Benefits and Challenges of Common Currency Adoption for ASEAN Countries

The essay presents an insight of the significant benefits of adoption of a common currency on the lines of the Optimum Currency Area theory, prima facie challenges in the implementation of the same and the related implications for the member states of ASEAN.

June 22nd, 2018
INTERNATIONAL FINANCIAL MARKETS AND INSTITUTIONS

ESSAY 1
Although there are a number of currencies in the world, the two most prominent
currencies are Dollar and Euro. While the former one is a single currency, the later one is a
common currency as adopted by the European Union and is being used in the 17 countries
throughout Europe. The 28 nation European Union had introduced Euro as the new currency
on January 1st, 1999 (Leonard & Taylor, 2016). Before the introduction of the Euro as the
common currency, there existed a number of the domestic currencies and the role of Euro
was restricted to be used as the exchange currency only among the member countries of the
union. However, Euro replaced the domestic currency usage in most of the member states
within the span of three years. The successful introduction of Euro as the common currency
among the member states of the European Union and the aftermath of the financial crisis of
the year 1997 had initiated the surge for regional integration among the member countries of
ASEAN. This has further raised the question as to whether a similar approach as to the
introduction of Euro for the European Union, would be suitable for the member countries of
Association of Southeast Asian Nations (ASEAN). The ASEAN was formed on August 8th,
1967 and is the world’s second most successful regional organization having 10 member
countries as of now namely Indonesia, Malaysia, the Philippines, Singapore, Thailand,
Brunei, Cambodia, Laos, Myanmar and Vietnam (Mahbubani, & Sng, 2017). The essay
presents an insight of the significant benefits of adoption of a common currency on the lines
of the Optimum Currency Area theory, prima facie challenges in the implementation of the
same and the related implications for the member states of ASEAN. The essay concludes that
in spite of the existence of few challenges, the introduction of a common currency union for
the ASEAN countries on the lines of the European Union can be beneficial in the long run.
The Asian continent does not possess any common currency, accordingly, the
international trade governing the Asian countries takes place by first exchanging these
domestic currencies into major currencies like Yen, Euro or Dollar. As a result, the Asian

ESSAY 2
currencies face high competition in terms of value. The question as to what are the major
benefits of the usage of the common currency has been answered as under. Firstly, the
introduction of common currency allows smooth flow of trade among the member countries.
The basic aim towards the introduction of Euro currency was also to build a common market
for trade and to allow free movement of capital, goods, and people (European Union, 2018).
The facilitation of trade occurs by the reduction of transaction costs and the avoidance of
fluctuations arising out of exchange rate differences among various countries. Eventually,
there is an enhancement in the overall growth rate in the field of trade and commerce at both
the national and international levels. The trade statistics of ASEAN countries for the year
2015, show that Intra-ASEAN exports accounted for the US $ 305,693 million, while the
Intra-ASEAN imports accounted for US $ 238,059 million (ASEAN, 2016). In percentage
terms, the total intra trade accounted for about 24 % of the total trade (ASEAN, 2016). As
depicted by the figures, ASEAN member countries are already dependent on each other for
about a quarter of their total trade and therefore, the adoption of a single currency would aid
in the trade by increasing the openness in trade practices and the volume of the intraunion
trade. The second major advantage of common currency introduction which is in line with the
first one is that common currency would lead to access to goods and services at competitive
prices by lowering the prices of the trading of goods and services in between the member
countries. As inside the Eurozone, reduction in the bilateral trade cost and other transaction
costs such as hedging cost has lowered the marginal cost of the bilaterally traded goods,
further leading to efficient price-cost markup. The common currency adoption has led to the
creation of tourism opportunities and has also reduced the cost of traveling for the European
nations not only for the business purposes but also for studies and holidaying (Santana-
Gallego, Ledesma-Rodríguez & Pérez-Rodríguez, 2016). Following the European’s Central
Bank’s monetary policies, prices have also become stable in the European Union member

ESSAY 3
states, with inflation rates only being around 2 percent annually over the years (Riet, 2017).
In addition to the above as stated by the European Commission, higher trade integration leads
to the synchronization of the national business cycles, eventually leading to the uniform
shocks (Di Giorgio, 2016). That means a boom in one country can trigger the boom in
another country. The same benefits can be yielded for the member states of the ASEAN as
well. The third significant benefit of opting common currency would be the integration of the
regional currencies of the member nations. After the financial crisis of the year 1997, it was
quite evident that almost every ASEAN country’s currency was losing its value in light of
speculation (Harvie, & Van Hoa, 2016). The issue can be resolved if currency integration is
achieved which will allow a stable exchange rate system for the ASEAN countries and
flexibility against the strong international currencies like US Dollar, Yen, and Euro. For
instance, the euro exchange rate causes unification of the means of exchange in all the
member countries of the Eurozone, leading to the predictability of the exchange rates and a
means against the shock of exchange rate volatility as against other currencies of the
world. The benefit can be described with the help of an example. Suppose a company in
Thailand decided to buy a machinery from a company in Singapore, and there is no fixed rate
system. The rate of exchange at the time of contract between the Singapore Dollars and Thai
Baht was 1 SGD to 25 Thai Baht. The company thus decided to pay 250,000 Thai baht i.e.
10000 SGDs. However, due to some economic shocks, the exchange rate on the settlement
date changes to 1 SGD = 30 Thai Baht. Accordingly, the company in Thailand would be
required to pay 300,000 Thai baht for the said machinery. If only there was a single common
currency between the two nations, one gets rid of the exchange risk and the resulting
fluctuations. A single currency makes it easier to plan the business and as a result the
investment increases. The fourth major benefit of the introduction of the common currency
for ASEAN is that it will assist in the economic integration amongst the member countries, as

ESSAY 4
stated by the Optimum Currency Theory. Robert Mundell had developed the Optimum
Currency Theory in the year 1961 (Johnson & Swoboda, 2013). According to the Optimum
Currency Theory, the option of the creation of a common currency union must be opted for, if
the economic costs in relation to its creation are less than the economic benefits. This can
take place only if the transfer of labor and capital is high among the countries joining the
union. As a result in the event of the crisis in one member country, labor and capital are free
to move to the other member country and having a better economic performance and this, in
turn, will prevent the situation of unemployment. The microeconomic fundamentals are good
among the ASEAN6 and there has also been a strong track record of regional cooperation in
the past years (Richard, Masahiro & Ganeshan, 2014).
Though a few challenges of common currency implementation in the ASEAN
countries exist. These are described as follows. The first major challenge is that there is a
wide gap between the levels of economic development and the income differentials between
the member countries of ASEAN, unlike amongst the member countries of European Union.
For instance, the GDP per capita of Singapore for the year 2016 was $ 55,241 as compared to
that of Burma- Myanmar, which was $ 1196 in 2016 (Country economy, 2018). As it is seen,
the Singapore’s per capita GDP is around 48 times higher than that of Burma. The bigger the
gap is, the more difficult it is for the countries to economically integrate with each other.
While the degree of diversity among the European nations is lower, and hence monetary
union sustainability is much easier for the countries of European Union. The second major
challenge posted on the way of the common currency adoption is the cooperation and the
harmonization of the banking and other financial sectors of the member countries. Among the
member countries of ASEAN, Singapore has the most sound banking and financial system. In
order to introduce a common currency like Euro, the resource pooling system enhancement is

ESSAY 5
must in order to sustain the exchange rate crisis. The issue can be sorted with the creation of
the institutions like European Council, European Central Bank, and European Commission.
The creation of the Asian Free Trade Area (AFTA) is a significant move aimed at the
elimination of tariff and liberalization of trade practices, in order to economically integrate
the countries in Asia (Okabe & Urata, 2014). The ASEAN Swap Arrangement (ASA)
covering the ten ASEAN member countries has been extended to South Korea, China, and
Japan in the year 2000 (Kawai, 2015). In addition to this in June 2003, the central banks of
Australia, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, New Zealand, the
Philippines, Singapore and Thailand have been working for the Asian Bond Fund (ABF) in
order to meet the financial crisis (Emery, 2018). The efforts for the establishment of ASEAN
Economic Community (AEC) by 2020 are on, as decided in the Bali Concord held in Bali in
the year 2003 (Menon & Melendez, 2017).
As per the discussion in the previous parts, it can be concluded that adopting a
common currency in the globalization era can have significant benefits for the member
countries of the ASEAN. Though it had taken about fifty years for the countries of Europe
since the start of economic integration, until the adoption of the common currency. Therefore
it can be said, for single currency adoption in ASEAN, it would still take few more years to
achieve the goal. Over the years, these countries have already tapped successful economic
goals implementation at an unparalleled pace. But the first stage to such adoption would be to
pursue a set of systematic background efforts that act as the base for an effective framework
for common currency usage. Greater efforts towards political integration between the
member countries are needed to approach faster towards the common currency introduction.
The resulting major benefits occur on the lines of the creation of a large common market for
trade and commerce, eventually leading to the growth of the volume of trade at both national
and international levels. This is followed by the integration of the economies leading to better

ESSAY 6
allocation of resources. In addition to this, greater facilitation of trade would reduce the cost
of the goods and services and the goods and services would be available at competitive
quality and prices. The benefits continue to trickle down to common citizens as the cost of
traveling for studies or business purpose would be reduced as it did, in the case of the
European nations. Achieving price stability, avoidance of exchange rate fluctuations and
business synchronization are some other benefits. The creation and implementation of the
international institutions and agreements like AFTA, ASA, ABF, and AEC would prove to be
a strong base for the regional and economic integration before the common currency
adoption. The road to common currency adoption for ASEAN is not that smooth though. The
challenges of diversity in the economic developments of the member countries as depicted by
the differences in the per capita GDP, correlation of the banking and other financial
resources, needs to be overcome first in order to successfully implement the common
currency for the said countries. Also at first stage, it is recommended that the adoption be
made in the developed countries having similar GDPs and later on be implemented in the
other countries of ASEAN.

ESSAY 7
References
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ESSAY 8
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