A Roadmap for East Asian Monetary Integration

1. Kyungtae Lee and Deokryong Yoon A Roadmap for East Asian Monetary Integration 2006. 10

2. I. Introduction II. The Need: Why Are We Talking about Monetary Integration in East Asia? III. The Feasibility of Monetary Integration in East Asia IV. The European Experience and Implications V. A Roadmap for Monetary Integration in East Asia VI. A Common Vision as the Basis for a Roadmap VII. Conclusion List of Contents

3. 1. To stabilize the exchange rate High proportion of trade in GDP Avoid competitive devaluation 2. Contagion Effect High intra-regional trade: 16.1%→23.7% (China, Japan, Korea, 1993~2003) High intra-regional investment: 8.1%→18.7%n(China, Japan, Korea, 1993~2003) 3. Speculative Attack - Small sized currency is easier to attack. 4. Efficient use of regional resources East Asia is the largest capital exporter and importer 5. New engine of economic growth - Asia accounted for over half of the world’s growth since 2001(in ppp) II. The Need

4. II. The Need: Why Are We Talking about Monetary Integration in East Asia? <Table 1> Weights of Exports and Imports among China, Japan, and Korea Source: IMF. 2006. Direction of Trade Statistics Database.

5. III. The Feasibility of Monetary Integration in East Asia • Three criteria to appraise the feasibility: Self-sustainability, Optimum-Currency Area, Non-economic conditions • Self-sustainability • - Size: almost equal GDP in ppp, to Europe, North America, • 2nd greatest trade volume but rapid growing/ • Largest foreign reserve (See Table2) • - External dependency: external dependency decreased and influence of East Asia increased • → 1% economic growth of world economy induced • 1970s: 1% , 1980s: 0.2% economic growth in East Asia • → 1% economic growth of US economy induced • 1970s: 0.8% , 1980s: 0.2% economic growth in East Asia

6. III. The Feasibility of Monetary Integration in East Asia • 2. OCA-Criteria • Openness: Higher intra-regional trade in East Asia (23.7%) than in Europe (21.3%) • Inflation: East Asia(6.0%) shows higher average inflation rate than the Europe (4.3%), but stabilizing trend. • Volatility of real exchange rate: higher in East Asia than in Europe • Business cycle synchronization: Lower degree of co-movement in East Asia • Degree of financial integration: East Asian countries invest 14.3% in the region whereas European countries put 57.2% in the region.

7. III. The Feasibility of Monetary Integration in East Asia • 3. Non-Economic Conditions • A broad spectrum of political systems • Historical legacy • Low profile of regional identity • Lack of experience for cooperation • Different religious/cultural backgrounds • Low expectation to receive external support

8. III. The Feasibility of Monetary Integration in East Asia <Table 2> Economic Indicators of the Three Blocks (2004) (billion dollars) * East Asia includes Japan, NICs (Korea, Taiwan, Singapore, Hong Kong), ASEAN 4 (Indonesia, Malaysia, the Philippines, Thailand), and China. ** GDP (market exchange rates) was calculated with the data provided in WDI 2005. Sources of other data: IFS (International Financial Statistics), IMF; World Factbook (http://www.odci.gov/NS-search-page=results), CIA; WDI (World Development Indicators).

9. III. The Feasibility of Monetary Integration in East Asia <Figure 1> East Asian Economic Dependency on External Economies* * Each number shows the result of rolling regression using the economic growth of ten years (by that year) of the East Asian economy without Japan. Source: Rhee (2004).

10. III. The Feasibility of Monetary Integration in East Asia <Table 4> Trade-GDP Relations (1990–2003 Average)* (percent) * The figures show the relation of average exports and imports between two countries to GDP.

11. III. The Feasibility of Monetary Integration in East Asia <Table 5> Average and Standard Deviation of Inflation 1975–89, 1990–2003 (percent)

12. III. The Feasibility of Monetary Integration in East Asia <Table 6> Indicators of Price Synchronization* * The figures are calculated according to Alesina, Barro, Tenreyro (2002) and the high figure implies low synchronization.

13. III. The Feasibility of Monetary Integration in East Asia <Table 7>Product (Net GDP) Synchronization * A high figure means low synchronization of the business cycle.

14. III. The Feasibility of Monetary Integration in East Asia <Table 8> East Asia’s Stock of Financial Assets (2003) (million dollars )

15. III. The Feasibility of Monetary Integration in East Asia <Table 9>International Investment in East Asia, 2003 (million dollars)

16. IV. The European Experience and Implications • The European Experience • The process of monetary integration: • <Policy coordination and exchange rate cooperation> →<A Common exchange rate system> → <Monetary union> • Policy coordination and exchange rate cooperation: channels to share important information and to avoid policy- conflict • Common exchange rate system: • EMCF – precondition for intervention • Snake – problem of double bands (internal and external) • EMS – ECU, ERM, EMCF (three pillars) • EMU: EMI, ECB, Convergence criteria • ⇒ What is important is political initiative!

17. IV. The European Experience and Implications • 2. Major components of a Roadmap • The process of monetary integration: • Information sharing and policy dialogue  Loose exchange rate cooperation and policy coordination → Close exchange rate cooperation and policy coordination → A fixed exchange rate system → A currency union through substituting national currencies with a common currency • Timing and sequencing • - Multi-track approach • - Need conditions to select the countries which can go over to next stage

18. V. A Roadmap for Monetary Integration in East Asia • Current cooperation mechanism • Policy dialogue: Economic Review and Policy Dialogue (ERPD) • Financial Arrangements: Chiang Mai Initiative (CMI) → Post-CMI • ⇒ Crisis prevention mechanisms, not for accelerating monetary integration • 2. Suggestions • Rana(2006) • - develop CMI into Asian Monetary Cooperation Fund (AMCF), then Asian Central Bank (ACB) • - AMCF can issue Asian Currency Unit and introduce exchange rate mechanism • - ACB issues single currency

19. V. A Roadmap for Monetary Integration in East Asia • 2. Suggestions • Haihong (2006) • - Short term: institutionalize policy dialogue and surveillance mechanism • - Medium term: AMF and regional exchange rate mechanism • - Long term: Monetary union • 3. European experience: Three stages • -1st stage: Creation environment for coordinated policy making • -2nd stage: Establish common exchange rate mechanism • -3rd stage: Create regional central bank • ⇒East Asia needs a detailed Road Map for monetary integration.

20. V. A Roadmap for Monetary Integration in East Asia <Table 3> The Three Stages of the Monetary Integration Process

21. Monetary integration will take a long time → Setting a long term Asian vision will be necessary To use RCU in the private sector, the official use must precede it. → Long term vision of monetary integration needed Long-term vision of monetary integration will encourage the countries to introduce regional exchange rate mechanism Declaration of a vision would not incur any costs, but high profit. Start the monetary cooperation process with setting a common vision VI. A Common vision as the Basis for a Roadmap

22. East Asian countries realize the need of regional cooperation - To prevent a possible recurrence of crisis - To maintain exchange rate stability Lack of roadmap and lack of common vision The most important thing to start the monetary integration process is to arrive at a common vision for East Asia and draw a roadmap to realize the vision. VII. Conclusion

23. Thank you for your attention!