The Process of Economic Integration in ASEAN + 3: From Free Trade Area to Monetary Cooperation or Vice Versa?

Günter S. Heiduk and Yiping Zhu
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Günter S. Heiduk: Duisburg-Essen University
Yiping Zhu: Duisburg-Essen University

Chapter 4 in EU - Asean, 2009, pp 73-95 from Springer

Abstract: Since the late 1960s, ASEAN member states have achieved considerable progress in reducing trade barriers between them. As a result, intra-regional trade grew from 15% of ASEAN's total trade in the early 1970s to almost 25% in the middle of the 1990s (Fig. D.1). The Asian financial crisis in 1997, however, drew attention away from trade to the monetary sector — at least for a short time. Since then a vivid but controversial academic discussion on the basic features of the future integration strategy has evolved. Put clearly, the discussion addresses the question as to whether ASEAN integration strategy should focus on creating a closer monetary cooperation or on furthering integration in product markets. The second strategy is often challenged by arguments that it represents a European model, which cannot work in ASEAN. Some economists also argue that ASEAN is not ready for deeper monetary integration, because this region does not meet the criteria of an Optimum Currency Area (OCA). The theory of the OCA deals with the costs and benefits of a common peg currency regime in an integrated region. Mundell's (1961) seminal article first set out the concept of an optimum currency area. Later literature includes classic contributions by Mckinnon (1963) and Kenen (1969) among others. These economists propose different criteria suitable for measuring the degree of integration required for the introduction of a common peg currency regime: 1. The extent of trade: If the intra-regional trade ratio is high, the establishment of a monetary union will reduce transaction costs. 2. The similarity of the shocks and cycles: If countries experience similar shocks, the cost of giving up monetary policy independence will decrease. 3. The degree of labour mobility: Higher cross-border labour mobility can be a useful mechanism for adjusting to asymmetric shocks which lead to high unemployment rates in a sub-group of members. 4. The system of fiscal transfers (if any): A fiscal transfer system can alleviate the impact of regional shocks from income differentials.

Keywords: Exchange Rate; Monetary Policy; Economic Integration; Exchange Rate Regime; Asian Development Bank (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1007/978-3-540-87389-1_5

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