Introducing Common Currency in South Asia

Background

The present century is the Asian century. In last few decades, South Asia has emerged as a major economic power centre not only in the region but also in the world. This region inhabits 21 per cent of world population, though it occupies only 3 per cent of global geographical area. It recorded annual rate of economic growth of 7.1 per cent in 2016.1 In terms of GDP (PPP), it happens to be the third largest economy in the world next only to the United States and China.

In fact, there was not much difference in the level of economic growth among the South Asian countries until the 1950’s when they all had agrarian base. But in the subsequent years there was major divergence in the rate of economic growth among the different countries of the region. Some countries made rapid rate of economic growth; while the others lagged behind. All this created a huge gap in the level of growth in agriculture, manufacturing, trade and services sectors among the different countries of the region.

India is the only matured industrial and high-tech country in South Asia that accounts for 80 per cent of the regional economy. In fact, it is the centre of gravity in South Asia. With 7.6 per cent rate of economic growth, India emerged as the fastest growing economy in the world in 2015-16 even surpassing China whose rate of economic growth was 6.7 per cent in 2016.2 During her visit to India, International Monetary Fund managing director Christine Lagarde predicted India's GDP to get doubled within a decade in 2019 from its level in 2009.3 By then, India's GDP might exceed the combined GDP of Germany and Japan.4

Potentiality is quite huge for South Asia to emerge as a strong economic power block at the global level if the countries of the region cooperate with each other to harness their resources for their common good. With this view in mind, President Zia ur Rahman of Bangladesh had taken bold initiative in early 1980s for the regional integration of South Asia. The establishment of South Asian Association for Regional Cooperation (SAARC) in Dhaka in 1985 was a step in that direction. SAARC's basic objective was to improve the quality of life of the people through the promotion of collective self-reliance among the countries of this region.

SAARC, in fact, is economic and geopolitical organization of eight South Asian countries, including Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. But the achievements made so far by SAARC for regional economic integration for over last three decades has not been up to the expectation. For all practical purposes, the South Asian region happens to be the least integrated region in the world.5 Regional cohesiveness is still very far off. SAARC could not evolve into an effective regional block due to some of these factors. But such challenges not only exist in South Asia, but in other regions of the world as well. Countries in European Union had also suffered from some of these anomalies, but due to their continuous efforts they were able to address them to a certain extent.

Despite certain shortcomings, it cannot altogether be overlooked that SAARC has been able to create conducive environment for the establishment of peace and development in the region. It was created with the spirit of South Asianization of the group of countries, which was largely absent in the past. This is really unique. The SAARC member countries took bold initiative for the regional integration when they signed South Asian Preferential Trade Arrangement (SAPTA) in 1993 with a view to promoting mutual trade and economic cooperation in South Asia. Significantly, they also signed South Asian Free Trade Area (SAFTA) in 2006 to reduce the customs duty to zero by 2016.

In fact, the implementation of SAPTA and SAFTA by the SAARC member countries has opened new avenues for greater movement of goods and services, apart from strengthening people-to-people contact. All such developments induced major players among the countries of the region to give a new thought for the introduction of common currency in South Asia with a view to ensuring further integration of the region.

Mooting the Idea of Common Currency

The concept of regional economic cooperation evolved in post World War II period when the European countries became aware of the futility of war. They learnt how to benefit for their common good by cooperating with each other. Such a tectonic shift in the outlook of the European countries encouraged even hostile powers to get together on a single platform and form European Union in 1993. Subsequently, the common currency, Euro, was introduced on January 1, 1999, which is managed by one common supranational central bank, the European Central Bank. The bank greatly contributed towards the Europeanization of Europe.

Significantly, the idea of regional economic integration did not remain confined to Europe alone, but it created waves at the global level. Accordingly, a number of regional groupings were formed in various parts of the world. Efforts were made to give due shape to the idea of Asian currency or even African currency at the continental levels. Sometimes, thoughts were also given for the introduction of 'one global monetary union,' 'one global central bank' and 'one global currency.'

The Southeast Asian countries, including Thailand, Singapore, Malaysia, Indonesia and Philippines formed Association for South East Asian Nations (ASEAN) in 1967. Success achieved by ASEAN is exemplary. Now ASEAN has grown in its strength after the inclusion of Myanmar, Laos, Cambodia, Vietnam and Brunei Darussalam. The large volume of tradable sectors among the ASEAN countries has enabled them to reach a stage in which they could form monetary union and introduce common currency in the region.6 In 2000, some attempts were made at the academic level in Japan to formulate plan for the monetary and fiscal cooperation. In fact, that was the embryonic efforts towards Asianization of Asia.7 China strongly backed Japan when it gave a call for the introduction of single Asian currency during the 15th ASEAN Summit in Cha-am Hua Hin in Thailand in 2009.8

Developments taking place in Europe and among ASEAN member countries had its effect in South Asia as well. Among the different regional groupings, the 'euro' worked as igniting factor as it inspired different regional groupings to think for the introduction of common currency. From the success of euro in European Union and the exercises made towards this end in Japan, expectations are that the SAARC member countries would benefit enormously if the common currency is introduced.

There was a greater realization among the SAARC member countries for the introduction of common currency. Credit largely goes to Indian Prime Minister Atal Bihari Vajpayee for mooting the idea of single currency in South Asia as far back as in 2003, together with his idea of creating borderless border among the countries of the region. However, it is a pity that the idea of common currency got due response in other parts of Asia, particularly in China and Japan, while it remained largely overlooked in South Asia.

Stages for the Introduction of Common Currency

The regional economic integration is sine qua non for the introduction of common currency. It is only in the advanced stage of economic integration such as in economic union that it is possible to introduce common currency. But before the formation of economic union, the regional organization like the SAARC or any other regional groupings needs to go through different stages economic integration.

The first and foremost state of regional economic integration is the formation of free trade area. At this stage, all such barriers in trade of goods and services among the member countries as related to tariffs, quotas and subsidies that restrict the volume of trade are removed. The member countries are free to form trade policies of their own in matter related to trade with countries outside the region. In the second stage of economic integration, the customs union is formed to ensure common external trade policy, which was lacking in the first stage. In the third stage of regional economic integration, common market is formed among the member countries to allow free movement of factors of production such as labour and capital. All the restrictions on the immigration or migration of population from one country to the other are removed and harmonious relations in monetary, fiscal and employment policies are maintained. It is only in the fourth stage of total economic integration that economic union is formed and common currency is introduced through the unification of monetary, fiscal, social and countercyclical policies for which a supra-national body is formed to make decisions that become binding force for all the member countries.9

Despite the fact that the member nations surrender part of their sovereignty in favour of economic gains through the introduction of common currency, they are able to retain autonomy in defence and foreign affairs. So far only the European Union is the example of economic union, though even this is imperfect one. Not all the member countries of the European Union have accepted Euro, which happens to be the common currency of the region. Similarly, even the tax structure differs from one country to the other. 10

Benefits of Common Currency

Andrew K. Rose finds that the two countries which have common currency happen to have trade three times more as compared to those others which have different currencies. 11 Studies suggest that the cost on account of the loss of monetary independence is minimal. Common currency regime tends to encourage business, promote movement of people from one country to the other and strengthen mutual trust among the countries, which in turn increases output and growth.12 Experience shows that under the monetary union there is an increment in formal trade and reduction in informal trade. Monetary union is of great help in economizing foreign exchange reserves13 and creation of monetary fund. The replacement of multiple currencies by common currency reduces transaction costs, apart from increasing the volume of trade and investment. It also reduces uncertainty in the exchange rate market.

It will be most economical if one has to deal with only one currency in South Asian region. In the absence of such a mechanism, each time there is a loss when one converts one currency into the other.14 But when the common currency is introduced, it could enhance the bargaining power of the SAARC member countries in the international market. Then, India together with Nepal and Sri Lanka could form cartel and export tea in the international market at a higher price on account of an increase in their bargaining power. By the same token, India and Bangladesh could export jute at a higher price in the international market by adopting the same strategy. And, India and Pakistan could jointly move to get better price for Basmati rice in international market.15

Unfortunately, the South Asian countries have adopted inward-oriented development policies, which have largely affected the growth of trade and investment in the region. In 2010, the intra-regional trade among the SAARC member countries recorded only 4.3 per cent.16 Study shows that South Asia was able to achieve only 43 per cent of its total intra-regional trade potential of US$37.55 billion in 2010.17 Even until recently the volume of intra-regional trade in South Asia could not exceeded 5 per cent when the volume of intra-regional trade was 26.4 per cent in ASEAN.18

Introduction of common currency might pave the way for the growth of intra-regional trade, investment and economic cooperation together with the growth in GDP. Such a development would tend to increase production and distribution of goods, ensure greater movement of scientific and technical manpower, apart from raising the revenue of the states and reducing the magnitude of poverty in South Asia.

Expectations are that the common currency in South Asia would ensure greater connectivity through transport, energy distribution, fiber-optical cables and IT systems needed for the growth of interregional trade and investment. In fact, connectivity ensures competitiveness of respective economies, which is due to the greater movement of people, services, ideas, innovation, knowledge, technology and capital from one country to the other.19 The more is the connectivity the greater will be the need for common currency. Significantly, the countries of South Asian region have already made a beginning for increasing connectivity, including in power sector.

Prospects for controlling inflation and interest rate are higher if the monetary policy is regulated and governed by a supra regional body like the South Asian Central Bank. In such a situation, each SAARC member countries would cease to have independent currency of their own. The common currency will not be the currency of any particular country. Only the regional level South Asian Central Bank will be responsible for the currency creation and for regulating monetary policy. Such a step would also tend to compel the South Asian countries, particularly India and Pakistan to remove prevailing mistrust and pave the way for further economic integration of the region. Both in Europe and Southeast Asia, economic factors pushed long-term enemies to become friends.

The introduction of common currency could help accelerate the rate of economic growth of South Asian region to a much higher level. Expectations are high that the countries of the region would be able to achieve minimum seven to eight per recent of rate of economic growth, which might help in addressing the problem of poverty in the region effectively. 20 This might also help the countries of the region to focus more on development and allow its benefits to trickle down to the poor.21

Significantly, certain loose form of monetary union already exists in South Asia and this is quite distinct between Nepal and India. The Nepalese rupee is already pegged to the Indian rupee. Currency of each country is accepted in other, though on limited scale. This could be a model for SAARC member countries. In this context, it needs to be mentioned that the Indian rupee has more of international acceptability than the currency of any other country in South Asia. So the Indian currency could be treated as anchor currency in the region. But in case any member country of the region does have any problem in accepting Indian currency as anchor currency, a new currency could also be evolved as common currency that might be weighted by economic strength of each of the member countries.

Challenges in Introducing Common Currency

South Asia is home to conflicts, which are major impediments in regional economic integration. Indian supremacy in South Asia in sheer size of population, geography and economy are source of concern for some of the smaller neighbours, but India regards such problems merely as the creations of the neighbouring countries. Given the conflict and dichotomy in some of these fields, the SAARC member countries might not like to lose their traditional sovereignty by accepting common currency.

Almost all the countries of the region are plagued by strife as related to caste, creed, language and ethnicity. Internal strife like the (earlier) Maoist problem in Nepal or Tamil problem in Sri Lanka created major political instability in those countries. Often, the internal strife tend to divert much of the state's resources from development to security, which are largely unproductive in nature. Countries including India, Pakistan, Nepal and Sri Lanka are heavily affected by separatist movements causing ruptures in governance sector. Illegal migration of population from Bangladesh to India is rampant and it has affected the relations between the two countries. Religious differences between Shia and Sunni Muslims have created major strife in Pakistan.

Inter-state conflict such as between India and Pakistan or Pakistan and Afghanistan are issues of concerns in South Asia. Lack of homogeneous political systems in the region is one of the primary causes of hostility and mistrust among the SAARC member countries. Escalation of arms race among the countries of the region, particularly between India and Pakistan, is also a problem. While there are military-backed or authoritarian regimes in some countries; there are democratic regimes in the others. Such divergences in political systems in different countries have often affected bilateral relations resulting into border disputes, terrorism and even full blown wars in the region.

The introduction of common currency cannot be hassle-free in light of the lower levels of trade, investment and connectivity among the countries of the region. Besides, there is a greater possibility that certain SAARC member country could even go to the extent of blocking the idea of common currency. Since consensus among the member states is pre-condition for the introduction of any plan and programme in SAARC forums, it would not be so easy to introduce common currency in the region.

Of late, China has exhibited its activism to become member of SAARC. Most intriguingly, China used some of the Nepalese senior politicians and diplomats to advocate for its membership status in the 18th SAARC Summit in Kathmandu in November 2014, 22 though it is not a part of South Asia. Indications are that China does not seem to be satisfied with its observer status in SAARC along with such other observer countries as Australia, European Union, Iran, Japan, Mauritius, Myanmar, South Korea and the United States. Any attempt on the part of China to enter into SAARC would further vitiate the working relationship among the existing member countries. Possibly, India and even other countries of South Asia might not be comfortable with Chinese unnatural entrance in this body. Potential Chinese dominance in South Asian region and the fear of rivalry between China and India in the region for the leadership of SAARC might defeat whatever zeal that the South Asian countries do have for the introduction of common currency. Perhaps being aware of this problem, India tried to ignore China's backdoor initiative to join SAARC.

Most of the South Asian countries, including India have become wary for the decline in the value of their currencies in terms of international currencies, particularly the US dollar. Gradually, they are sliding into crisis with the recovery of US and Western economies. With their weak currencies, it would be difficult for South Asia to emerge as a stronger power centre as a block in the world.

Besides the volume of trade, investment and factor market linkages are very low in South Asia. There are several impediments in the movement of goods, capital, people from one country to the other in this region, which is a major stumbling block in monetary cooperation in the region.23 But this is not the case with SAARC member countries alone. Even the ASEAN member countries don't have much of intra-regional trade among themselves as compared to the member countries of EU or NAFTA.

A Way Forward
A momentum has now been gathered for South Asian economic integration, though on a snail's pace through the introduction of SAPTA and SAFTA. Now time has come for SAARC member countries to introduce common currency. The SAARC member countries could form South Asian monetary union and one common currency to be managed by one supranational central bank, which could be called South Asian Central Bank.

Need for the common currency is felt because there is virtually minimal cost in its introduction. Even the cost of monetary independence to the SAARC member countries due to the introduction of common currency would be quite inadequate in comparison to the enormous gains that they might have from the expansion of trade and investment opportunities. On top of it, the prospects for the economic integration of SAARC member countries will be far higher if they introduce common currency. However, not much research work has been conducted on South Asian money. Acute paucity of literature on the subject demands vigorous debate on potential costs and benefits of common currency in the region. A serious debate needs to be launched in the region on pros and cons of the formation of monetary union, central bank and the introduction of common currency.

The traditional notion of sovereign nation state economy now needs to be reviewed and the fresh approach for the formation of supranational macroeconomics to begin. Certain conditions should be fulfilled for the introduction of common currency so that it could prove equally beneficial to all the SAARC member countries. Transparency should be maintained in introducing such currency and the member states should be fully aware of its future. The formation of monetary union and thereby introduction of common currency in South Asia could go a long way in resolving conflict both at the inter and intra-state levels. Political conflict in South Asia could be moderated, if not eliminated, with the introduction of common currency.

It is high time for the SAARC member countries to translate the notion of 'one money to one South Asia' into reality in the same way as the European Union was able to exhibit 'one money to one Europe.' They should move forward for the formation of monetary union by even excluding any country that could dare to block the introduction of common currency. If needed, "SAARC-minus-one" strategy might be moved ahead for the introduction of South Asian common currency. Britain and Denmark have not yet accepted Euro as their currency in European Monetary Union. Those countries are having their own currencies. If a particular country does not want to be the member South Asian Monetary Union, it could be free to do so. But then it would not enjoy the privileges that the other member countries of South Asia would enjoy in this region for having single currency. A beginning could initially be made to introduce common currency at the level of BBIN or BIMSTEC as the climate of cooperation is better at the sub-regional level.

(Jha is Executive Director of Centre for Economic and Technical Studies in Nepal.)

Refrences

1. Press Release, “South Asia Remains World’s Fastest Growing Region, but Should Be Vigilant to Fading Tailwinds,” The World Bank, April 10, 2016.

2. National Bureau of Statistics, “China 2016 GDP Growth Weakest in 26 Years,” January 20, 2017 in http://www.tradingeconomics.com/china/gdp-growth-annual.

3. Editorial, "Make In India," The Times of India, March 18, 2015.

4. Asit Ranjan Mishra, " India could fuel global growth, says Lagarde," Mint, March 17, 2015, p. 8.

5. Mark Tully, "The Border Deal Can Open Many Doors in South Asia," The Hindustan Times, May 23, 2015.

6. Thiam Hee NG, "Should the Southeast Asian countries form a currency union?," The Developing Economics, XL-2, June 2002, p. 132.

7. M. Dutt. 2009. The Asian Economy and Asian Money. Bingle; Emerald Group Publishing Ltd., p. xvi.

8. Ramchandran Shastri, "A common currency for South Asia to end rupee's woes," 27th August 2013 in http://www.dnaindia.com/analysis/column-a-common-currency-for-south-asia....

9. Bela Balassa. 2013. The Theory of Economic Integration. Routledge in https://books.google.co.in/books?hl=en&lr=&id=mUmRLOFDW5EC&oi=fnd&pg=PR3....

10. Ibid, pp. 71-72.

11. Andrew K. Rose, "One Money, One Market: Estimating the Effect of Common Currencies on Trade," 2000, p. 1 in faculty.haas.berkley.edu/arose/Grav.pdf.

12. Sweta Chaman Saxena, "India's Monetary Integration with East and South-east Asia: A Desirability Study," 2003, page 9 in www.bis.org/repofficepubl/arpresearch200706.1.pdf.

13. Sisira Jayasuriya and et al, "A Single Currency for South Asia: Economics and Politics of Monetary Integration," Economic and Political Weekly, July 16, 2005, p. 3160.

14. Anup Chaowdhury and et al, "Prospects and Possibilities of Introducing a Common Currency in SAARC countries," BRAC University Journal, Vol V, no. 2, 2008, pp. 67-79.

15. Ibid.

16. Bishwa Nath Bhattacharyay, "Prospects and Challenges of Integrating South and Southeast Asia," International Journal of Development and Conflict, April 2014, p. 46 in http://www.ijdc.org.in/uploads/1/7/5/7/17570463/article_3.pdf.

17. Prabir De, "Connectivity, Trade Facilitation and Regional Cooperation in South Asia," Commonwealth Secretariat, April 2013, p. 2 in http://ris.org.in/images/RIS_images/pdf/South%20Asia%20meeting%202-3%20m....

18. Moushumi Das Gupta and Jayanth Jacob, "India to go ahead with S Asia road link plan without Pakistan," The Hindustan Times, May 24, 2015.

19. Bishwa Nath Bhattacharyay, "Prospects and Challenges of Integrating South and Southeast Asia," International Journal of Development and Conflict, April 2014, p. 57 in http://www.ijdc.org.in/uploads/1/7/5/7/17570463/article_3.pdf.

20. Anup Chaowdhury, no. 15, pp. 68-69.

21. Parvaiz Ishefaq Rana, "Common Currency for Saarc proposed," DAWN.Com, January 7, 2012 in http://www.dawn.com/news/686427/common-currency-for-saarc-proposed.

22. Subhajit Roy and Yubraj Ghimire, "China field top Nepalese politicians, diplomats in a bid to enter SAARC," The Indian Express, November 25, 2014 in http://indianexpress.com/article/world/asia/china-pushes-nepal-in-bid-to...

23. S. Jayasuriya and et al, "A Single Currency for South Asia: Economics and Politics of Monetary Integration," in Economic and Political Weekly, Vol 40, No. 29, July 16-22, 2005 in http://www.jstor.org/discover/10.2307/4416907?sid=21106103013593&uid=4&u...


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