GULLIVER’S TROUBLES in Longitude dicembre

GULLIVER’S TROUBLES

WHY IS ASIA AFRAID OF A MONETARY UNION

Giuseppe Pennisi

Almost a quarter of a century ago, twelve Asian and Pacific countries met in Canberra on 5-6  November 1989 to establish the Asian and Pacific Economic Cooperation (APEC), still alive and well and with a small permanent Secretariat in Singapore. APEC was established with aim of developing a closer economic collaboration in the vast and potentially most dynamic area of the world. In the corridors of the first APEC meetings, it was occasionally stammered the word ‘ integration’; the eyes were, at least partly, set on the process of economic integration in Europe, on the benefits such integration  was  providing to the Old Continent in terms of growth, quality of life and convergence between countries at different level of development and with quite diverse histories, traditions, languages and culture. In short, the Old Continent was seen as the giant Gulliver to imitate, in terms of technology and growth, even though with a much smaller area and population. Now APEC has 31 member countries (including the United States, Canada, the Russian Federation and all the Latin American countries bordering on the Pacific Ocean). On 19-20 September, APEC Finance Ministers held their twentieth annual regular meeting in Nusa Dua, Bali (Indonesia). The main theme was  Resilient Asia-Pacific, Engine of Growth, as spelt out in the very title of the basic report prepared for the reunion .In short, the giant Gulliver was no longer the Old Continent but the set of countries around the Pacific Ocean. Indeed, Europe was seen as an old man who had lately made many mistakes.

APEC  provides, of course, for only a very loose economic cooperation: it is  mostly a forum for dialogue rather  than a mechasim to mold common policies and strategies and to open trade and financial markets.

 Meantime, a large number of smaller and closer organizations have been created within the Pacific Basin-. A full page of this magazine  would be needed only to list the acronyms and to summarize their meanings and functions. The most significant is the ASEAN Free Trade Area (AFTA) , created in 1993 and in full swing since 2000. ASEAN stands for the Association of Southeast Asian Nations-  a geopolitical and  economic organization of ten countries located in Southeast Asia which was formed on 8 August 1967 – thus, twenty two years before APEC- by Indonesia, Malaysia , the Philippines , Singapore and Thailand; since then, membership has expanded to include Brunei, Cambodia, Laos, Myanmar, and Vietnam. Its aims include accelerating economic growth , social progress, cultural development among its members, protection of regional peace and stability, and opportunities for member countries to discuss differences peacefully. ASEAN covers a land area of 4.46million km², which is 3% of the total land area of Earth, and has a population of approximately 600 million people, which is 8.8% of the world's population. The sea area of ASEAN is about three times larger than its land counterpart. In 2011, its combined nominal  GDP had grown to more than US$ 2 trillion. If ASEAN were a single entity, it would rank as the eighth largest economy in the world.

In the first stages of its evolution . ASEAN borrowed many an idea from the developments that in the Old Continent, featured what now is the European Union  (EU) . In 1992, a Common Effective Preferential Tariff (CEPT) scheme was signed as a schedule for phasing tariffs and as a goal to increase the region’s competitive advantage as a production base geared for the world market. CEPT was cleared patterned after the EU common tariff. CEPT acted as the framework for AFTA. After the East Asian Financial Crisis of 1997-98, on the one hand , a cooperation mechanism was established with the EU (the Asia Europe Meeting, ASEM) to examine, for example, what Asian countries could borrow from the European social policies, especially from the social protection network) with the view of alleviating the burden of financial and economic stringency on the poorer population-. Italy had an important role with a major ASEM meeting  held in Caserta Royal Palace.

 On the other, a Malaysian proposal was revived, on 24 March 2010,  at a ASEAN summit in Chiang-Mai (known as the Chiang-Mai Initiative, CMI), which called  for better integration between the economies of ASEAN as well as the three other countries (Japan, People’s Republic of China PRC and South Korea) grouped in a ASEAN-PLUS compact. In February 2013, ASEAN  began the first round of negotiations with the group’s six major trading partners – Australia, India, Japan, New Zealand, PRC and South Korea- on establishment of the Regional Comprehensive Economic Partnership which  includes a road map toward a free trade area and a single market. Aside from improving each member state's economies, the bloc also focused on peace and stability in the region. On 15 December 1995, the Southeast Asian Nuclear Weapon Free Zone Treaty was signed AMD after a long ratification process  it became fully effective on 21 June 2001.

Let us focus on the financial and economic integration, and more specifically on the CMI. Whilst after the establishment of the CEPT, work toward a free trade area was making progress, the CMI was seen as the start of a financial and monetary cooperation through the establishment a network of agreements (now they are about twenty) broadly patterned after the European exchange rate agreements and mechanism (colloquially called the ‘European Monetary System’ EMS) that paved the way to the European Monetary Union (EMU) and the euro as a common currency. A study carried out by Pradumma B. Rana , then a senior official of the Asian Development Bank (ADB) and published in 2002 (Monetary and Financial cooperation in East Asia: The  Chiang Mai Initiative and Beyond)  was clear on this point. The analysis pointed out that until then, not much attention had been paid to the need to promote regional monetary and financial cooperation. This was considered ‘ surprising’  as cooperation in finance provides more opportunities for “win-win” situations. However, the pace of monetary and financial cooperation had picked up in the post 1997-98 crisis period. The study concluded: ‘Countries in East Asia appear to have mustered a certain amount of  political will  to propel the process further. Cooperation has ranged from information exchange and surveillance, to establishing regional financing facilities and early warning systems. Beyond the Chiang Mai Initiative, efforts are also under way to coordinate macroeconomic and exchange rate policies mainly under the ASEAN. Task Force on ASEAN Currency and Exchange Rate Mechanism of the Asia-Europe Finance Ministers group. As a regional development bank, the Asian Development Bank is supporting the efforts of its developing member countries to strengthen regional monetary and financial cooperation’’ . In other terms, in 2002, it appeared possible and desirable to replicate the European path from a free trade area to a single market in the trade area and from a network of exchange rate agreements to a fully fledged monetary union. In the monetary area, the Asia Europe Finance Minister group was a parallel to the ASEM group working on social protection during crisis period.

A few later, a study by Masahiro Kawai of  the Institute of Social Science of the University of Tokyo  (East Asian economic regionalism: progress and challenges) published in the Journal of Asia Economics (February 2005) demonstrates that the East Asian economies had achieved strong economic interdependence, particularly through external liberalization, domestic structural reforms and market-driven integration with the global and regional economies. Expansion of foreign trade, direct investment and financial flows has created a “naturally” integrated economic zone in East Asia. Reflecting the rising economic interdependence and in response to the traumatic financial crisis of 1997–1998, East Asia has embarked on various initiatives for economic regionalism. Such initiatives include the formation of several bilateral FTAs, the beginning of negotiations for sub-regional FTAs, the establishment of a regional surveillance mechanism, the introduction of a regional liquidity support system (CMI) and Asian bond market development. These essentially entail the formal institutionalization of de facto economic integration and interdependence in East Asia in a way that complements global frameworks of the WTO and the IMF. The paper identifies a number of challenges facing the region, including the need to begin negotiations on a region-wide FTA and to initiate exchange rate policy coordination. Many other studies in this direction may be quoted, especially interesting those by Yoo-Duk Kang of the Korean Institute for International Economic Policy comparing inter-industry trade (particularly in Information Technology) in East Asia and in the EU. Of special relevance is the volume edited by Michael Plummer and Chia  Siow Yue published in 2009 by the Singapore-based Institute of Southeast Asian Studies Realizing the ASEN Economic Community: A Comprehensive Assessment; it is a full blueprint for a single market and beyond.

In May 2013, viz. eleven years after Rana’s work, a good study by Robert Owen of the Tokyo based ADB Institute, ADBI, ( Governance and Economic Integration- Stakes for Asia) appears much less sanguine. As the very summary states: The paper assesses the nexus between changes in governance structures—at national and cooperative international levels—and evolutionary processes of economic integration in light of regional policy targets in Asia. The analysis highlights the importance of improved governance as an essential condition for effectively attaining an “Asian Economic Community” while arguing that the experience of the European Union (EU) offers valuable insights regarding the process of integration.  Thus, from outright endorsement , the approach has changed to much less committal valuable insights regarding the process of integration.  In another recent ADBI paper (Lessons from European Spaghetti Bowl), the respected specialist in international economics, Robert Baldwin of the Graduate Institute of International Studies of  the University of Geneva, purports that  European economic integration fascinates and inspires Asia (and namely ASEAN) for the way it brought peace to a continent torn by violent and long-standing rivalries. The lessons from Europe, however, cannot be applied directly as the degree of the EU’s supra nationality is unthinkable elsewhere.

In 2002 , the European currency union appeared to be well set to soon become a dynamic area with the euro as a strong competitors to other major currencies, specifically to the US dollar. Now , even from the Asian viewpoint , it seems that  the euro’s founding documents (ie the Maastricht Treaty ) enshrined such principles as fiscal constraints, the “no bailout clause,” and assignment to the ECB of the goal of low inflation to the exclusion of monetizing national debts, but .these very principles  have been permanently compromised within EMU. On the one hand, German taxpayers cannot be expected to agree to bailouts of profligate euro members without end. On the other hand, if they were to insist on those founding principles, the euro would not survive. It is especially important to recognize that the (predictable) impact of fiscal austerity has been to reduce output in the periphery countries, not raise it, and thereby to raise debt/GDP ratios, not lower them. The movement toward a banking union is one of the steps in the right direction; others are  more adjustment time for Greece, Portugal and Spain; and ECB bond purchases. But for the countries that are to remain in the euro, much adjustment still lies ahead: more debt-reduction (painful for the creditor North) and more internal devaluation (even more painful for the uncompetitive South). As to a long-run fiscal regime that addresses the now-exacerbated problem of moral hazard, the Fiscal Compact is not enough in itself. These steps need to be complemented, at least, with the red-bonds/blue-bonds proposal and with the delegation of forecasting to independent fiscal agencies. Thus, with further departures from the Maastricht Treaty which could become the frame of a patchwork of measures.

East Asia has its own monetary integration problems and issues. For instance,. The Republic of Korea would not actively participate in any discussion of establishing a regional monetary and exchange rate arrangement as it is expected to maintain a weakly managed floating regime. The People’s Republic of China (PRC) has been fostering the yuan as an international currency, which will lay the groundwork for forming a yuan area among the PRC; the Association of Southeast Asian Nations (ASEAN); Hong Kong, the PRC; and Taipei,China. Japan has shown less interest in assuming a greater role in East Asia’s economic integration due to deflation, a strong yen, slow growth, and political instability. Japan would not eschew free floating. These recent developments demand a new modality of monetary cooperation among the Republic of Korea, Japan, and the PRC. Otherwise, ASEAN may lose its rationale for steering regional economic integration in East Asia. Nonetheless, Gulliver’s (the Old Continent) troubles in struggling with its own monetary union seem to suggest to the ASEAN-PLUS leaders to go slow in their own financial and monetary integration – and may be to set it aside until they have seen how Europe sorts out its own issues and problems.

Also since 2007 the EU crisis has shown an additional aspect, East Asian Governments are quite concerned about: integration appears to promote divergence , rather than convergences, between the ‘have’ and the ‘have not’ countries. This is clearly depicted in a recent paper by Richard Pomfret (Asean’s New Frontier: Integrating the Newest Members into ASEAN Economic Community in Asian Economic Policy Review Vol.8, 2013). Before accepting a full professor position in the University of Adelaide, Pomfret has taught for more than a decades in Bologna and published widely on the issues of economic integration of the poorer areas (ig Italian Mezzogiorno) in the EU. Since Vietnam, Lao People's Democratic Republic (PDR), Myanmar, and Cambodia joined ASEAN in the 1990s, concerns have been raised over a Development Divide. The real division is between ASEAN members participating in the integrated East Asian economy and those that do not. The older ASEAN members have become more efficient traders, and Cambodia, Laos, Myanmar, and Vietnam must reform faster if they are to catch up. Cambodia, Lao PDR, and Myanmar are not meeting the challenge, but Vietnam may be leaving the laggards, and the Philippines is lagging the leaders. The challenge is how to avoid a two‐tier ASEAN with fast‐growing modern economies coexisting besides inward‐looking poor countries. A challenge very similar to that faced within the EU, and more specifically within EMU.

An additional reason of why, after setting the path toward a monetary union with the CMI, now Asia is leery, and may be outright afraid, of moving forward. Until it is crystal clear how EMU sorts its own troubles out and where it goes.