Is it time to withdraw the PHL peso, Thai baht and Indonesian rupiah?


A new administration in Malacañang offers the opportunity to rethink existing economic policies. This should be welcomed. While we hope to 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 concurrent global inflation could lead to a sustained increase in travel and transportation costs. Well-publicized supply chain disruptions could become a regular occurrence. Continued tension between China and the United States seems a certainty. In this environment, the East Asian development model of making goods for export – a model that has succeeded in lifting hundreds of millions of people out of poverty – will be less reliable.

If we want to continue the miracle of East Asia, to raise the standard of living, we will need different policies. For the 10 members of the Association of Southeast Asian Nations, a starting point was made in 2015 with a commitment to build the Asean Economic Community (AEC) to create a single market and a regional production base. This would be an economy of more than 660 million people, large enough for regional companies to enjoy economies of scale comparable to those of China, the European Union and the United States.

There are many obstacles to the full integration of diversified economies. ASEAN has tackled some of the most important, for example the reduction of tariffs. But the critical step in realizing the AEC will be when companies regularly look beyond national borders to do business the same way they would in their own country. This is not happening today.

In trade statistics, we can see that over the past decade, the bulk of imports and exports to and from ASEAN economies have been with non-regional trading partners. In 2011, non-ASEAN partners accounted for 75.7% of total ASEAN trade, rising to 78.8% in 2020. Although the pandemic clouds any certain picture of trends, there is no evidence that trade between ASEAN economies has increased as a share of total trade. —ASEAN businesses are mostly concentrated outside the region. Cross-border investment statistics present a similar picture; most of this investment came from outside the region.

There are many reasons why companies focus on their home markets and avoid cross-border efforts. On the one hand, as tariffs have fallen, non-tariff barriers have risen; countries close their markets to foreign producers through various administrative measures. This attracts official attention and, although politically annoying, can be dealt with.

Another reason for ASEAN companies’ lack of regional perspective is the currency risk to bear. An Indonesian company trying to do business in the Philippines should accept that changes in the value of the peso and rupiah affect profitability. The viability of the company may depend on changes in exchange rates – every company then becomes a forex speculator.

This would not be crucial if ASEAN exchange rates moved in the same way. However, the graph below shows that the exchange rates of different countries do not evolve in the same way.

Uncertainty is an obstacle to action. The existence of multiple exchange rates in the different members of Asean discourages the development of a true single market. European governments have understood this. Most members of the European Union have abandoned their national currency in favor of a regional currency, the euro.

No, the euro does not solve all problems and, like 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 advantages in European economic integration. The protracted eurozone crisis has been a harrowing experience; Greece’s GDP fell by more than 26% between 2008 and 2013. But the euro has boosted cross-border trade and investment. Moreover, it helped give constituent countries global influence – in international political economy, size matters.

The issue of currency unions in Asia has been studied extensively by scholars, although governments have not taken it seriously. No, Southeast Asia is not an optimum currency area. On the one hand, work is not entirely mobile; people are not free to move from one country to another to find work as they can in the United States or the European Union. However, the ASEAN visa program has greatly facilitated travel and transit in the region.

To renounce national currencies is to renounce an independent monetary policy, which presents real risks. The 10 countries do not have synchronized economies. The economic cycle of exporting oil and gas in Brunei does not move with its neighbor Indonesia. But most countries are susceptible to similar influences – they experience shocks to each other.

A single currency for Asean would not be something to be established tomorrow. But tomorrow would be a good time to start synchronizing exchange rates. This would imply that monetary authorities, ministries of finance and central banks, including in their set of objectives, stabilize the relationship between their national exchange rate and regional trends. Experience in Europe in the 1990s shows that it is possible.

No, now is not the time to withdraw the peso, baht or rupee. But it’s time to plan for retirement.

The author was previously responsible for coordinating regional cooperation projects in Southeast Asia for the Asian Development Bank.


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