A new administration in Malacañang offers the opportunity to rethink existing economic policies. This should be welcomed. While we will hopefully see some relief from Covid-19, the world will not return to the old normal. Some things have changed. In East Asia, the pandemic and the concurrent global inflation could result in long-lasting, higher costs for travel and transport. The well-publicized disruptions to supply chains might become a regular occurrence. Continued tension between China and the United States seems a certainty. In this environment, the East Asian development model of manufacturing goods for export—a model that successfully raised hundreds of millions of people out of poverty—will be less reliable.
If we want to continue the East Asian miracle, to grow living standards, we will need different policies. For the 10 members of the Association of Southeast Asian Nations, a starting point was made in 2015 by committing to build the Asean Economic Community (AEC) to create a single market and regional production base. This would be an economy of more than 660 million people, large enough for regional firms to enjoy economies of scale comparable to those in China, the European Union, and the United States.
There are many obstacles to fully integrating diverse economies. Asean has tackled some of the more important—for instance, reducing tariffs. But the critical milestone in realizing the AEC will be when firms routinely look across national borders to do business in the same fashion as they would in their own country. This isn’t happening today.
In the trade statistics, we can see that over the last decade, the bulk of imports and exports flowing to and from Asean economies were with non-regional trading partners. In 2011, non-Asean partners accounted for 75.7 percent of total Asean trade, rising to 78.8 percent in 2020. Although the pandemic muddies any sure picture of trends, there was no evidence that trade between the Asean economies grew as a share of total trade—Asean businesses focus primarily outside the region. The statistics for cross-border investments present a similar picture; the bulk of that investment came from out of the region.
There are many reasons businesses focus on their national markets and shun cross-border efforts. For one, as tariffs fell, non-tariff barriers have increased; countries are closing their markets to foreign producers through various administrative actions. This is attracting official attention and, although politically enervating, can be dealt with.
One further reason for the lack of regional perspective by Asean firms is the foreign exchange risk to be borne. An Indonesian firm that tried to work in the Philippines would have to accept that changes in the value of the peso and of the rupiah would affect profitability. The viability of the business might turn on exchange rate shifts—every business then becomes a forex speculator.
This would not be crucial if Asean exchange rates moved in the same manner. However, the chart below shows that the exchange rates of the different countries do not move as one.
Uncertainty is a barrier to action. The existence of multiple exchange rates in the different members of Asean discourages the development of a true single market. The European governments understood this. Most members of the European Union have abandoned their national currencies in favor of a regional currency, the euro.
No, the euro doesn’t solve all problems, and, as with any new institution, it brings new challenges. Brexit, the withdrawal of the United Kingdom from the European Union, shows that some see more costs than benefits to European economic integration. The protracted Eurozone Crisis was a harrowing experience; the GDP of Greece declined by more than 26 percent from 2008 to 2013. But the euro has stimulated cross-border trade and investment. Moreover, it has been instrumental in giving the constituent countries global influence—in international political economics, size matters.
Researchers have looked extensively at the issue of currency unions in Asia, although the governments have not taken it seriously. No, Southeast Asia is not an optimal currency area. For one, labor is not entirely mobile; people are not free to move from country to country to find work as they can in the United States or the European Union. However, the Asean visa program has considerably eased travel and transit in the region.
Giving up national currencies means giving up independent monetary policy, posing real risks. The 10 countries do not have economies that are synchronized. The business cycle in oil and gas exporting in Brunei does not move with its neighbor Indonesia. But most countries are sensitive to similar influences—they suffer shocks mutually.
A single currency for Asean would not be something to establish tomorrow. But tomorrow would be a good time to start synchronizing exchange rates. This would involve the monetary authorities, the ministries of finance, and central banks, including in their set of goals, stabilizing the relationship of their national exchange rate to regional trends. The experience in Europe in the 1990s is that it can be done.
No, it is not time to retire the peso, baht, or rupiah. But it is time to plan their retirement.
The author was formerly responsible for coordinating regional cooperation projects in Southeast Asia for the Asian Development Bank.