Monday, July 6, 2015

Prescient foresight

Pankaj Sharma

6 July 2015, New Delhi

The Manmohan Singh government made the right decision 
by scuttling a move for a common SAARC currency.

It was in the first week of January 2004 at the South Asian Association of Regional Cooperation (SAARC) summit held at Islamabad in Pakistan, that the then prime minister of India, Atal Behari Vajpayee mooted the vision for a common currency. Vajpayee’s suggestion was welcomed by loud cheers and generous applause. Almost a decade later, now when we are witnessing the fall of Greece because of its decision to join the Euro-zone, perhaps the governments of the Congress-led United Progressive Alliance were prescient in not travelling down the same path.

I don’t know how earnest Vajpayee was while announcing his vision at that time. However, it would not have been easy for India to keep this idea in cold storage for long had Vajpayee became prime minister again in 2004. Even if it was one of those economic initiatives which have low rationality and high expediency quotient. The Indian electorate chose the Congress to lead the country. The Congress-led ruling party chose Dr. Manmohan Singh to lead the government. Singh had full command over the macroeconomic scenario being a noted economist himself. Within a few months of assuming charge, he raised some serious questions which forced on a much-needed reality check on the topic of SAARC currency.

Those in favour of a common SAARC currency still advance four fundamental arguments in its support. First, they argue that a common currency is a characteristic of strong regional economic integration and, therefore, a worthy goal in itself. Second, they point out that currency unification will eliminate unnecessary exchange risk and uncertainty and thereby promote inter-country trade and investment. Third, there will be a reduction of transaction costs arising from currency conversions. Fourth, advocates back a currency union in the belief that it will promote political unity amongst the constituent nations.

The first argument is really not a valid argument at all. It simply states that trans-regional economic integration is a good thing and, therefore, any country should pursue it by all available means.However, the real question is whether any such integration is in the national interest? The fourth argument is a statement of faith perhaps. The Greece episode has taught us that  one of the most important tools of economic stabilisation for any country control over the supply of its own currency. Greece is an example of using this macroeconomic intervention very poorly. Various countries in Europe have very different economies and different domestic economic situations. It is almost impossible to have a monetary policy that is equally appropriate for Greece and Germany. If today Greece regrets joining the Euro-zone, there is merit to that feeling of regret. Greece is perpetually stuck with an ineffective monetary policy with disastrous consequences for its economy. 

Similar is the situation in SAARC countries. They all have their own circumstances and economic solutions. Common currencies have usually followed political unification often attained through imperial conquest. Political unity has not been catalysed through currency unification.  Euro had  preceded full political unity to 50-year-old enterprise of European unification, spawned by the trauma of two world wars. But Greece experience has raised several questions. Greece is openly admitting that it was its mistake to join the Euro-zone.  The situation in South Asia is more complicated. It is surely a very wishful pipe dream to think that the fault lines of political conflict and rivalry between India and Pakistan can be effectively bridged through a programme of monetary unification. On the contrary, the slow progress of the South Asia Free Trade Area (SAFTA) suggests that political antagonisms have and will seriously impede efforts at regional economic cooperation. Intra-SAARC cross-border flows of capital are even less significant in relation to total investment flows into SAARC nations.

If the loss of monetary independence and monopoly are not important, why then developed countries think in the direction of having a common global currency for the whole world?

The huge economic costs recently suffered by Argentina at the collapse of its unsustainable currency board system, a weaker version of a common currency with the US, should offer some warning to armchair proponents of currency union for SAARC. Why should India, the largest SAARC country,  consider ceding monetary autonomy to a regional SAARC central bank when countries such as USA, Canada, Australia, China and Russia are not ready even to give a thought to the idea of a common global currency?

Why in Zimbabwe’s case no developed nation is inclined to analyse the core realities of the problem?  Back in the day when they changed the name of the country from Rhodesia to Zimbabwe, the Zimbabwe Dollar (ZWE) was worth the US $ 1.47, but by 2006, the ZWE was already becoming worthless, effectively trading at just over half a cent of a US dollar. Then it got worse as hyperinflation kicked in. The result is that the government issued four rounds of currency devaluations ending with the final laughable situation of issuing a 100 trillion dollar note worth around the US $300 when issued.

Developed countries are cautious about adopting a single world currency primarily because, they say that, in the absence of single global government it would be difficult to establish adequate checks and balances on a global central bank. The U.S. Federal Reserve is technically independent, but it is also fundamentally a creature of their parliament, one that could in principle be dissolved at short notice. Nascent government institutions of the European Community are still fairly weak. But they provide some forum for supervision of the European Central Bank. Currency, particularly in its function as a unit of account, is a natural monopoly, there are several reasons why it may be desirable to maintain some level of competition as it provides a check on inflation. In an era of ongoing financial innovation, in which paper currency may well become defunct in coming years, why the economic experts of all the representative geographies with varied economic, social and political situations do not put their heads together to find out the solutions to stop ‘Greeceisation’ of national economies? Is the time not ripe now?

Author is Editor and CEO of News Views India.

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