SAARC came into existence in 1985, at a time when there were no visionaries left among the political class of the Subcontinent. That is itself eloquent testimony to the irrelevance of the project as it was envisaged then, because when Southasia did have statesmen of vision, none of them suggested a regional arrangement of this kind. Clearly, they had enough acumen not to succumb to the delusion that such a thing would work in an acrimonious neighbourhood. The people of municipal competence who followed, rushed in to do what better men had disdained, and SAARC was born.
The beast was born dead, but feigned life. The pretence of being alive was sustained by various equally stillborn attempts to show signs of life. The most impressive of its achievements so far was SAPTA, which was unveiled in 1993 as a South Asian Preferential Trade Agreement. SAPTA stood still for so long that it resembled a mystic in an inscrutable trance. It failed comprehensively to generate a preference for each other’s goods and the quantum of trade within SAARC countries remained more or less static. As the successive attempts at regional co-operation failed, more and more grandiose schemes for intensifying economic integration were proposed, culminating, at the recently concluded SAARC summit, in the South Asian Free Trade Area (SAFTA). But even before SAFTA was discussed at the summit came the quirky proposal to introduce a common currency in Southasia.
The only successful attempt at creating a currency union is the Economic and Monetary Union of the European Union, which gave rise to the Euro, whose long and carefully worked out history stands in sharp contrast to the bungled attempts to introduce regional economic co-operation in Southasia. Europe commenced its practical quest for a common currency through the Maastricht Treaty 1992, about the same time that the eminently forgettable SAPTA was let loose on Southasia. The Maastricht Treaty, which laid the timetable for the creation of the Euro brought the European Union into being, giving a more coherent form to the European Community, which itself came out of a long experiment with the creation of a common market through a customs union formed by some countries and the establishment of a European Free Trade Association by other countries.
The origin of the European Union is conventionally traced to the Treaty of Rome of 1957, which brought into existence the European Economic Community. In reality it goes back to the seemingly more humble European Coal and Steel Pact of 1951, intended to prevent war through the pooling of steel and coal resources. In other words, the countries of Europe started out with a desire to end intra-European war and in the process worked out the mechanisms for a common market and free trade zone, which converged in the European Community before creating a European Union which finally adopted a common currency in 1999. Europe took five decades and a lot of co-ordinated and negotiated effort to achieve this.
Southasia stands everything on its head and nowhere is this more clearly evident than in the proposal to initiate a currency union long before putting in place lesser forms of co-operation, like simply following the ordinary civilities of diplomatic interaction or the creation of a functioning regional forum for negotiations. Such confidence-building measures precede intermediate steps like the creation of a free trade zone or a customs union. Unlike the trajectory followed by Europe in its search for internally peaceful co-existence, some Southasians states have been hellbent on intra-regional war, and when they could find no justification to actually wage war they contrived reasons to threaten to go to war. And in the midst of all this hectic conflict and the hysteria of war and mutual recrimination the region absent-mindedly created a regional body that pretends to promote co-operation. When the promised co-operation failed to materialise, it found still more ostentatious ways to move towards its illusory goal by departing even further from the fundamentals required to achieve them. So, 11 years of failure leads to a weak arrangement like SAPTA being superseded by a weak arrangement like SAFTA, which is clearly not up to the task of promoting trade integration, because, once again, the municipal minds behind the project overlooked the most obvious fundamentals. Between SAPTA and SAFTA lay two sets of nuclear tests and a war over some barren wastes in Kargil, besides some skirmishes along the Bangla-India border and some disputed territory along the India-Nepal border, and some militarised activity in Bhutan on India’s behalf. All of this is in addition to the almost permanent state of conflict between India and Pakistan over Kashmir. But lest anyone accuse the region of not thinking big in a constructive way, the prime minister of India announced, even before SAFTA could be discussed into existence, that a common currency should be introduced in the region.
Predictably, in an excitable Subcontinent that is so easily prone to applaud its own genius, this casual statement by the Indian prime minister has been greeted with a euphoria that almost suggests that an ill-advised proposal has already become a well-designed policy. Experts and columnists have hailed it as the miraculous path to making Southasia an economic powerhouse.
Tarun Das, Director General of the Confederation of Indian Industry, articulates the typically complacent Indian corporate perspective. According to him, a common currency will cut transaction costs for domestic businesses as they start to increasingly trade with each other. Since SAPTA could not, in 11 years, manage to increase the volume of intra-regional trade above the pathetically low levels that have been historically prevalent, and since the prospects under SAFTA are not much brighter, the number of beneficiaries of a common currency on this count will be extremely limited, unless there is a dramatic improvement in the trade figures. He also goes on to add that a common currency for 1.3 billion people will make Southasia an even bigger market for foreigners to invest in.
This is the kind of hype that does well on television, but the fact of the matter is that a little over a billion of this total population already lives inside an economy with a single currency called the INR, and yet this extraordinarily large market has not been very successful in attracting foreign direct investment (FDI). Das also argues that companies in each of the Southasian economies will be able to raise funds from the other member countries. However, he seems to have overlooked the obvious fact that in comparison to the Indian economy, all other countries have very weak formal financial systems so that the claim of mutual benefit is more fictitious than real. Even if his point is to be conceded, his next claim that a bigger market of savings will result in lower interest rates for all borrowers, which is good for businesses everywhere, is questionable because this argument is based on the heroic assumption that the investment climate in Southasia is generally robust and higher interest rates are the only constraint. This need not always be true, since the constraint of weak demand cannot necessarily be offset by a lowering of interest rates to induce greater investments. In any case, other factors, like the level of capital controls and international ratings tend to weigh heavily with investors.
Das also proceeds to make the argument that a common currency will help tourism by removing the inconvenience of converting currency. This is not a uniformly applicable argument since if this incentive has to operate, all the other inconveniences of travel in the Subcontinent will have to be lifted. Indians travelling to Nepal or Bhutan do not face the currency conversion problem. In reverse it does not work with the same charming simplicity, but since the currency is freely convertible between these countries there really is not all that much of an impediment to tourism. The problem for the tourist is the visa restriction as much as currency conversion. For a Pakistani tourist to India, or vice versa, removing currency difficulties in fact will not really be of much help unless the absurd and infantile limited-destination visa regime is removed. It is hard to enthuse tourists to revisit on the mere promise of removing conversion problems when they have to go through the tiresome routine of reporting to the police every morning and reassuring paranoid states that they are not up to any mischief. In effect, a common currency on its own can do little to help anyone, unless all the other preconditions that go with making it successful are met.
Carried away by enthusiasm, Das suggests a timetable of implementation of four to six years. This optimism rests on the fact that Europe took only eight years to introduce the Euro. The reality is that Europe took only eight years to introduce the common currency from the date of finalising the timetable for its implementation. But finalising that timetable was preceded by 40 years of intensive efforts to attain the preconditions that facilitated the objective of a common currency. SAARC’s dismal history does not inspire the confidence that it can even update its website on time, let alone introduce regional co-operation of the kind that can pave the way for a common currency.
A currency union requires funda-mental conditions to be met before it can come into existence. Globally, Europe can be treated as the excep-tion. The EU represents 6.3 percent of the world’s population, 20 percent of global GDP, and over 40 percent of world exports. Southasia has 25 percent of the world’s population, 2 percent of global GDP and less than 1 percent of global trade. In the circumstances, it is advisable for Southasian policy makers not to eye Europe as a model for immediate emulation. On the other hand, the East Caribbean Central Bank Area, which follows a common currency, is too small as a point of comparison with the Southasian vastness.
The other major economic blocs have not been particularly energetic about introducing a common currency. The North American Free Trade Area is by default dominated by the dollar, but that does not make it a currency union. While many of the economies, owing to the pressure of dollarisation of transactions, considered switching over to the dollar, this was not the outcome of a managed and negotiated process of creating a union. A union, after all, is an entity that benefits all its constituent members. A more equal trading arrangement is Mercosur, a Latin American regional integration mechanism, with Brazil, Paraguay and Uruguay as full members, and Bolivia and Chile as associate members. Though it is the fourth largest economic region in the world, it continues to remain a customs union and there is no indication of any move towards a common currency. Latin America seems, for the present, to be looking only at the prospect of a South American Free Trade Area. This, in all probability, could emerge as the real SAFTA.
ASEAN offers possibly the most proximate point of comparison for Southasia. Even here the news is not promising for Southasian common currency enthusiasts. ASEAN, which is among the most well integrated economic blocs and which is 18 years older than SAARC, is still at the stage of implementing the Asian Free Trade Area and the Asian Investment Area. Numerous studies on the possibility of a common currency for ASEAN, while expressing cautious optimism for the distant future, emphasise the impediments to even medium-term fruition such as GDP, growth rate, interest rate and economic-system differentials. Though some ASEAN leaders have been enthusiastic about exploring the possibility of introducing a common currency, the fact that official deliberations on the preliminary feasibility workshops conducted so far have been postponed suggests that, at this stage, pursuing the issue could be more divisive than uniting because of the stresses that will arise from surrendering sovereignty and policy flexibility in crucial areas like interest rate, exchange rate, inflation rate and fiscal deficit management.
Economic, financial and political convergence is necessary to ensure the symmetry that is required for a currency union. But such convergence is predicated on the existence of conditions that enable convergence. Currency union is a technically complicated matter that traditionally involves the concept of optimum currency areas. It prescribes the economic circumstances which make a currency union beneficial to the countries involved. Important criteria in identifying an optimum currency area include the level of flexibility in real wages, the possibility of high labour mobility, and the low incidence of asymmetric shocks, ie, all countries in the proposed union must be similarly affected by external developments, as this indicates higher prospects for integration. For instance, the manner in which the east Asian financial crisis reverberated through many of the ASEAN economies is an indication of the uniform effects of external shock and this is deemed to indicate a possibly greater capacity for currency integration.
But despite the presence of certain favourable conditions, ASEAN’s difficulty lies in the high level of economic disparities within the region despite a creditable history of co-operation over 35 years. Growth rates for instance tend to vary widely. In 2000, Thailand had a 4.6 percent growth rate whereas Singapore grew by almost 10 percent in the same year. Per capita income differentials as between countries show huge disparities. Singapore’s per capita income of USD 32,810 contrasts sharply with Vietnam’s USD 335. In other areas too, the gaps are wide, ranging from the level of public debt, to current account balances and interest rates.
If these are the real constraints that have barred the immediate possibility of a common currency in ASEAN, the Southasian condition is even more pitiable. Product output is lopsided in India’s favour, since its GDP is almost 75 percent of the combined output of the entire region and its export trade is over 60 percent of the SAARC total. Likewise, all the other differentials that characterise ASEAN are present in SAARC in magnified form. What compounds matters is that SAARC lacks the kind of complementarities in ASEAN that make it possible to talk about a currency area for the latter at some future date. Intra-SAARC trade is in the vicinity of 5 percent of the global trade of its member countries. Trade complementarities are, by contrast, much stronger in ASEAN, with intra-bloc trade amounting to over 20 percent of the region’s total exports.
But even assuming that Southasian unionists were to disregard all these factors and strive for a common currency, they are likely to come up against the less technically complicated but the necessarily more difficult practical steps to set about implementing the process. These are the areas where Southasia displays high inefficiencies. For instance, it will be necessary to initiate realistic inter-governmental planning and create convergence plans within specified time frames. The complexities of the process are evident from the manner in which the EU went about the implementation of the common currency. Eligibility for entry into the union depended on meeting some fixed criteria: the budget deficit was to be held below 3 percent of GDP, the total public debt was to be kept below 60 percent of GDP, the inflation rate was to be maintained within 1.5 percent of that of the three EU countries with the lowest rate in order to stabilise prices, and long-term interest rates were to be restricted to 2 percent of the three lowest interest rates in EU.
The actual introduction of the common currency involved three stages of implementation. The first stage covered a three and a half year period from July 1990 to December 1993 during which the free movement of capital was introduced, the exchange rate mechanism was stabilised, closer co-operation between central banks was initiated and economic policies were co-ordinated. In the second stage, which extended from January 1994 to December 1998, member states were required to synchronise economic and monetary policies, the European Central Bank was established and participating countries had to fix their exchange rates. The final stage began in January 1999, when the single currency was introduced. This was a systematic process based on very high levels of co-operation. It is difficult to visualise countries that go to war over rocky bits of terrain and which deny over-flight permissions to neighbours on the slightest provocation being able to undertake such complex and synchronised multilateral measures.