By ANANT MISHRA [Former Youth Representative to United Nations]
Trade is happening in the world from ages. Barter system is now history; it is money that buys everything, well mostly. As globalization rose, currencies in various nations were effectively controlled by exchange rates. Since then “exchange rates” have been under scrutiny. Economists feel that a common currency should be introduced across the globe. This proposal was introduced in a recent SAARC meet and since then it has triggered a heated argument whether a common currency should be introduced or not.
A common currency represents a strong regional economic integration but critics have raised numerous questions on its legitimacy. It is however doubtful whether it will result in a national economic interest of member nations. Those who support the single currency point out that the currency unification will eliminate the risk of exchange rates and uncertainty and will promote international trade and investment. This will also lead to reduction in transaction costs due to currency conversions. This will also lead to stronger political ties among member nations. History is full of examples with nations having strong relations due to common currency. Although political unity is not yet achieved through this. One widely known example is more than 50 year old of the Europe along with its common currency “Euro” but traumatised by two world wars. On the contrary South Asia, its seems like a farfetched dream as the 66 year old political conflict and rivalry between India and Pakistan can be bridged through currency unification. Although, the slow progress of the South Asia Free Trade Area (SAFTA) says otherwise. It suggests that political conflict will heavily effect the regional economic cooperation.
Those who oppose, argue that this step will result in loss of sovereign control followed by many monetary policies. These policies would then follow some newly created policies of SAARC central bank which would create new policy making schemes for the regional banks. In short, RBI (followed by Ministry of Finance) will no longer be able to create or follow the monitory and exchange policies of India. Recent studies by eminent economist Maskay and others shows that the economic cycles of SAARC nations are not synchronised with the member nations (as mentioned in the member nations GDP growth and inflation). The reports also suggested that the monitory policies were very different as that of SAARC; hence it will take a lot of time to adjust. It will be hard to ignore the huge currency loss in Argentina because of its unstable currency board system (weaker common currency with the US) which tells us about loop holes in currency unification.
Andrew K. Rose of Berkley University clearly states that “an increase in trade disputes and frictions simply because the volume of international trade rises”. “If greater international competition leads to layoffs and associated labour market pressures, there could be an increase in pleas for continuation or enlargement of the social safety net”, he adds.
Professor Brijesh Gupta of Delhi University says that “we need a far freer movement of goods, services, capital and people across borders before the issue of currency unification can be treated seriously”. Well he is not wrong; the first point that nations will bring on common currency will mostly be on territorial disputes and geo politics.
Well it is also not wrong to say that, if common currency is achieved, it will provide substantial benefits to the region. Although uncertain on the removal of exchange rates, if the transaction costs are reduced, trade and investment will heavily boost the region. Also money creation on SAARC guidelines will synchronise inflation, interest rates, along with GDP growth, all of which will contribute to poverty elevation and accelerated growth. As a matter of fact, common currency will play an important role in achieving the targets of 7-8 per cent per annual GDP growth for all the member nations, which is the whole agenda. South Asia will benefit as a whole.
These benefits include –
- Reduction in transaction across all streams of business in with respective to all bilateral and multilateral trade. Factually the conversion of one currency to other costs that in turn increases the production and distribution costs. A Common Currency in SAARC Countries will result in no conversion costs.
- Increasing scientific and technical manpower within member nations as conversion losses is nullified.
- As there are no conversion costs, common currency will reduce the self sustaining informal forms of trade. If free trade is permitted, informal trade can be converted into a formal trade, which could result in heavy economic revenue for the government.
- Establishing South Asian Central Banks, which will further assist in economic integration
Those in support for common currency rule out four arguments in favour for currency unification.
First, the common currency will strengthen regional economic cooperation among member nations and which makes it a worthy goal.
Second, they rule out that common currency will eliminate the risks during exchange and will also promote trade and investment within member nations.
Third, the currency unification will reduce the transaction costs arising from currency conversions.
Fourth, the unification will promote political unity within the member nations.
The question can only be answered by exploring costs and benefits of economic cooperation through various means. Although argument fourth is just a faith as no real situation has been resolved. Meanwhile second and third arguments (eliminated exchange risk and reduced transaction costs) are genuine economic benefits of a common currency. The real question is how significant these benefits South Asian nations and how they react on currency unification, if imposed on member nations.
A rough idea on simulated and estimated accounts has been clearly mentioned in the journal of intra SAARC trade emphasizing on SAARC nations needs. This ratio is estimated around only 4-5 per cent over the past decade, despite SAFTA and bilateral trade agreements of SAARC nations. Also, intra SAARC capital trade flow is significantly less than the total investment flows by SAARC nations. Now for the first argument, it is clear that the currency unification will definitely benefit SAARC members.
Now the real question is, what about the costs? Although regional trade experts have a different say here, the cost will be variant for member nations. If at all the costs rises, it will be because of loss of sovereign control over monetary and exchange rate policies.
Overall, the studies points to only one direction – business cycles and shocks among SAARC countries. This clearly means that SAARC nations are happy with their freedom of policy action within their central banks and nation’s monetary and exchange rate policies. However, it does not come to us as a surprise as the issue of economic integration was never discussed during SAARC sessions before. It is also not possible to change the situation suddenly; also there is no possibility of future discussions on the same.
The advocacy of currency unification is similar to a case of putting the cart in front of the horse. There has to be a free movement of goods, services, capital, and people across borders within SAARC before considering the issue of currency unification. No nation has the political appetite to discuss currency unification.
India, the largest SAARC member nation, will consider taking the ownership of monitory policies of SAARC central bank along with the control over its institutional policies. Under these conditions it is highly unlikely that SAARC nations will agree for currency unification. To conclude, there are compelling economic and political reasons standing against currency unification for SAARC. It is an idea whose, time has not yet come, and quite frankly, it never will.[/vc_column_text][/vc_column][/vc_row]