Power of one

SAARC Currency
This is the Asian century in which South Asia has emerged as a major economic power at the global level. Though this region occupies only three percent area of the globe, it has 21 percent of its population. This dynamic region grew at 5.5 percent in 2014. In terms of GDP (PPP), it is the third largest economy in the world, next only to the United States and China. Since the inception of the present eight-member South Asian Association for Regional Cooperation (SAARC), the nations of South Asia have been inching closer towards economic integration.

Over the years a new spirit has evolved for the South Asia-nization of South Asia in which the concept of sovereignty of the nations is gradually fading, in exchange for greater economic benefits and trade, investment and economic cooperation. All of this was possible largely due to the signing of South Asian Preferential Trade Arrangement (SAPTA) by SAARC member countries (in 1993) and the subsequent agreement on formation of South Asian Free Trade Area (SAFTA) in 2006, with a view to bringing the customs duty down to zero by 2016.

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Aware of the potential of SAARC to boost regional integration, Indian Prime Minister Atal Bihari Vajpayee had mooted a common currency in South Asia in 2003. In the common currency region, member countries would to cease to have independent currency. The Central Bank of the region would be held responsible for currency creation and regulation of monetary policy. But this does not mean that member countries would lose autonomy in other vital areas like defense and foreign affairs.

Vajpayee's idea of common currency got some response in other parts of Asia, namely China and Japan. But it is a pity that this idea failed to gain ground in South Asia itself. The Association for South East Asian Nations (ASEAN) has been making efforts for introduction of common currency in South East Asia. At the academic level, some attempts have been made in Japan for monetary and fiscal cooperation in Asia. China strongly backed Japan when it called for introduction of single Asian currency during the 15th ASEAN Summit in Cha-am Hua Hin in Thailand in 2009.

However, common currency cannot be introduced haphazardly. It is only in advanced stage of economic integration, such as in economic union, that common currency is possible. In that process, a regional body needs to pass different stages of economic integration. The first of these stages is formation of free trade area in which all barriers in trade of goods and services as related to tariffs, quotas and subsidies are removed. In the second stage of economic integration, a customs union is formed in order to ensure common external trade policy. In the third stage, common market is formed among member countries to allow free movement of factors of production such as labor and capital. It is only in the fourth stage of economic integration, such as an economic union, that common currency is possible.

So far only the European Union is the sole example of economic union, though even this is imperfect given that not all member countries have accepted Euro, which happens to be the common currency of the region. Moreover, tax structures differ from one country to the other. The progress made so far by SAARC in increasing volume of trade and economic cooperation in South Asia is slow. But such problems exist not only in South Asia, but also in other regions. The EU member countries had suffered a lot on account of these problems, but due to their continuous effort to make the economic union work they were able to overcome barriers.

In light of the success of Euro in the EU, it appears that SAARC member countries would benefit enormously if common currency is introduced in South Asia. It would remove uncertainty involved in the exchange rate fluctuations of currencies and also eliminate transaction costs of currencies in the region. This might also pave the way for growth of regional trade, investment and economic cooperation together with GDP growth. That in turn would increase production and distribution of goods, ensure greater movement of scientific and technical manpower and raise the revenue of the involved states. Effective control of inflation and interest rate is possible if monetary policy is regulated and governed by a supra-regional bank.

A common currency can accelerate the economic growth of a region. Expectations are that the countries of the SAARC region would be able to achieve a minimum of seven to eight percent growth, up from the present level of 5.5 percent, which might help them address poverty in their midst. This might also help countries of the region focus more on development and allow its benefits to trickle down to the poor.

The formation of monetary union and thereby introduction of common currency in South Asia could go a long way in resolving conflicts, both at inter- and intra-state levels. Most countries of the region are plagued by internal strife due to terrorism, separatism and issues related to caste, creed and ethnicity. Besides, certain countries of the region have even gone to wars at different points of time. All such conflicts in the region could be moderated, if not eliminated, with the introduction of common currency.

Unfortunately, not much work has been done on this front. The paucity of literature on the subject is a major challenge. So there needs to be rigorous studies, both at the academic and government levels, on various dimensions of the issue. A serious debate on the pros and cons of monetary union, common central bank and common currency is long overdue. It is through some of these vigorous exercises that the long cherished goal of 'One Money for One South Asia' could materialize, in the same way as the Europeans were able to achieve their goal of 'One Money for One Europe.'

The author is Professor of Economics and Executive Director of the Centre for Economic and Technical Studies