Structural Change and Economic Dynamics

16 (2005) 91–110

Economic integration and prospects for regional

monetary cooperation in East Asia
Nathalie Aminian∗
Faculte des Affaires Internationales, University of Le Havre, 25 rue Philippe Lebon,
BP 420, Le Havre Cedex 76057, France

Received 1 January 2003; received in revised form 1 November 2003; accepted 1 February 2004
Available online 18 May 2004

Abstract

The recent Asian currency crisis and the launch of the euro have stirred much interest in regional
monetary cooperation in East Asia. This paper discusses the rationale and chances for such coopera-
tion. It is argued that, although regional incentives are not strong enough and the political prerequisites
for monetary unification are not yet given, almost all economic indicators suggest that East Asian
countries are ready for cooperation on economic grounds. Various proposals and institutional initia-
tives are examined and shown to be either insufficient to cope with currency crises or too limited in
their objectives.
© 2004 Published by Elsevier B.V.

JEL classification: F33; F36; F41; F42

Keywords: Monetary integration; Optimum currency area; Asia

1. Introduction

In contrast to developments in other world regions, efforts to institutionalize regional

economic and monetary cooperation in East Asia have been weak until recently. However,
the Asian currency crisis of 1997 hit most of the economies in the region with strong shocks
to their trade, capital inflows and incomes. Despite rapid recovery in some (but not all)
of the affected countries, the crisis may have long-lasting negative effects on economic
development in the region. That is one of the reasons why East Asian countries have shown

∗ Tel.: +33-232-7441-01; fax: +33-232-7441-33.

E-mail address: nathalie.aiminian@univ-lehavre.fr (N. Aminian).

0954-349X/$ – see front matter © 2004 Published by Elsevier B.V.

doi:10.1016/j.strueco.2004.02.002
92 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110

growing interest in economic and monetary cooperation. The question is what kind of
exchange rate regime could provide the stability to support trade and investment. And which
form of regional cooperation is required to promote economic growth in the long run?
The purpose of this paper is to discuss the rationale and chances for closer monetary co-
operation in East Asia and to consider different options for the corresponding institutional
arrangements. In most of the following, the region in question includes Japan, China, the
Asian NIEs and the Association of South East Asian Nations 4. The term newly indus-
trialized economies (NIEs) refers to Korea, Taiwan, Singapore and Hong Kong, whereas
ASEAN 4 refers to Thailand, Malaysia, the Philippines and Indonesia. With respect to trade
integration Brunei, Cambodia, Laos, Myanmar and Vietnam will also be considered.
The paper is organized as follows: Section 2 explains why there has been a growing de-
mand for coordinated monetary and collective exchange rate policy in East Asia. Section 3
provides a brief overview of the theoretical literature on appropriate exchange rate regimes
for emerging market economies. The focus is on intermediate regimes and the regional mon-
etary cooperation. Section 4 discusses the major characteristics of East Asian countries with
regard to their respective incentives for monetary cooperation and their readiness in terms of
trade integration. Section 5 examines whether the East Asian countries qualify as an Opti-
mum Currency Area. Section 6 investigates different paths towards closer monetary cooper-
ation in the region and discusses their economic and political feasibility. Section 7 concludes.

2. Growing interest in regional monetary cooperation

The precise causes of the Asian crisis of 1997–1998 are still being actively discussed. A
range of factors contributed to the region’s vulnerability:1
• the peg to the US dollar rather than a more balanced basket reflecting the region’s full
trade partners provoked a steep loss of competitiveness vis-à-vis Japan, and raised doubts
on the sustainability of the current account in the long run;
• financial liberalization that was introduced without an adequate prudential regulation
created financial fragility, which sharply limited the scope for tight monetary policy;
• both corporate and financial sectors combined substantial short-term currency liabilities
(mostly in US dollars).
While no consensus has yet emerged, various recent studies (Bénassy-Quéré, 1997, Kwan,
1998a, Sazanami and Yoshimura, 1999) tend to view the de facto pegged exchange rate sys-
tems of the region as a contributing—though not an initiating—factor. Before the crisis,
most of the emerging economies in East Asia pegged their currencies gradually, but with-
out coordination, to the US dollar, by overwhelmingly high weights to the US dollar in
determining the nominal value of their currencies. The benefits of such fixed but adjustable
exchange rate policy was to provide macro-economic discipline by maintaining prices of
tradable goods in line with foreign prices (Edward and Savastano, 1999). This exchange rate
policy contributed to the relative stability of the real exchange rate in East Asian countries

1 See Werner (2000) for the case of Thailand.

 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110 93

until 1995, and helped the governments to promote export-led high economic growth. Para-
doxically, East Asian countries have chosen US dollar pegs even though they were more
deeply linked with the Japanese economy. As a result, they took advantage of the yen appre-
ciation against the dollar and conversely suffered from the depreciation of the yen. There
is evidence that, as long as the US dollar was weak vis-à-vis the yen, these arrangements
gave a strong impetus to export-led growth by preserving competitiveness for products to be
sold in US dollar and to countries where the currencies were strong relatively to the dollar.
The dollar pegged systems also promoted the economic performance of Southeast Asian
economies, because they made the latter attractive for Japanese investors, thus playing a
key role in the expansion of intra-regional trade and foreign direct investment (World Bank,
1999, Sazanami and Yoshimura, 1999).
However, when the dollar started appreciating vis-à-vis the yen in 1995, it pulled all
these East Asian currencies along with it. Consequently, a sharp slowdown of exports and
economic growth was observed in the NIEs and the ASEAN 4. The pegs appeared less and
less sustainable. In the summer of 1997 they were finally tested and most of them were
eliminated by speculative attacks.
These shortcomings are also pointed out by Desthieux and Saucier (2002) who argue that
the risks of speculative attacks and regional contagion are increased when there is no efficient
cooperation supported by credible institutional arrangements. Speculative attacks tend to
be most contagious within regions that are strongly interconnected in trade and finance,
since interdependence tends to make the countries receptive to a common set of influences.
Desthieux and Saucier propose to test for contagion in the cases of the 1992–1993 crisis
in the European Monetary System (EMS) and the 1997 Asian crisis on the hypothesis that
the probability and the degree of contagion depend on the degree of interdependence. They
find that, while the European countries were more interdependent than Asian countries, the
contagion was rather weak in Europe. From this they conclude that the EMS, allowing for
a coordinated realignment of currencies, proved to be more resistant to shocks. Moreover,
the cooperation of monetary authorities and the coordination of macroeconomic policies
provide a compensatory effect in Europe. Conversely, the Asian system proved to bear the
costs of fixed peg regimes, without any benefit. Accordingly, Desthieux and Saucier stress
that, for emerging market economies such as the East Asian countries, pegging without
regional cooperation and coordination of macro-policies is not a wise strategy.
Inadequate exchange rate policies may also be obstacles to regional recovery and long-run
economic growth. The solution adopted by most East Asian countries since the currency
crisis is a kind of managed floating accompanied by some reregulation of the capital ac-
counts. This managed floating seems to shift progressively towards uncoordinated soft pegs
to the US dollar, similar to the situation before the crisis. However, the US is no longer the
most dominant economic partner, and the relative importance of Japan is as large as, and in
some cases, larger than that of the US. Given the continued volatility of yen/dollar exchange
rates, there will be excessive fluctuations in effective exchange rates of Asian economies,
with negative impact on regional trade, investment, and growth. While it may be desirable
for the region to move away from the US dollar pegged regime, it is not easy for any indi-
vidual country to unilaterally give up the current peg. This demonstrates the importance of
coordinated action on the part of the countries in the region. Moreover, with the introduction
of the euro, the risks for East Asian exchange rate instabilities have become greater. Policy
94 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110

conflicts between the US, the EU and Japan are likely to contribute to misalignments of the
key currencies that may spill over to the trade in the smaller currencies. On the other hand,
the polarization of the international monetary order into the dollar and euro blocs, may
encourage the formation of a countervailing bloc in East Asia (Goto and Hamada, 1995).
The new international environment and the Asian currency crisis have created a strong
impetus for regional cooperation and have provided Asian countries with a common in-
terest, which has led to the Chiang Mai Initiative (CMI) agreement on bilateral swaps and
discussions of the possibility of creating a monetary union among the ASEAN + 3 as a
long-run objective.
Indeed, there have been several initiatives to create institutions that help to prevent and
manage future financial crises and to enhance economic efficiency by developing sound
financial systems. Some of these attempts were successful while others failed. But their
common denominator is that they are weak and short in their objectives.
In September 1997, Japan put forward a proposal to create an Asian Monetary Fund
(AMF). The members of this institution would contribute some share of their foreign re-
serves to a central fund, which would be used to provide a financial assistance to countries
affected by currency crises. The United States, China and the IMF opposed the AMF pro-
posal on two grounds: soft conditionality and duplication. To provide financial help without
stringent conditions may create risks of inflation and moral hazard. Furthermore, creating
such an organization is a duplication of the existing IMF that could contribute to ambiguity
in dealing with crises. Officially the AMF proposal was withdrawn, but unofficially it was
interpreted as evidence that the USA would object any initiative altering the status quo in
the region and lowering the influence of the dollar.
In October 1998, Japanese finance minister Miyazawa made a new proposal on the
handling of the effects of the Asian crisis. This “New Miyazawa Initiative” aimed at setting
up a financial assistance scheme totaling 30 billion US dollars. In particular, it was suggested
that 15 billion dollars be provided as mid and long term assistance for the recovery of
crisis-stricken economies, and that another 15 billion dollars be used as provision against the
short term capital needs of the region. Moreover, Miyazawa pointed out that the dependence
of East Asian economies on the US dollar was one of the sources of the financial crisis, and
that this implied that the yen would have to take on a greater role in the region. Although the
active role of Japan during the Asian crisis was noticed and appreciated by other East Asian
countries, the New Miyazawa Initiative has met with strong criticism. Moon et al. (2000),
for example, have argued that the proposal is too Japan-centered, and that the attitude of
Japan in regional initiatives is rather ambiguous. The point is to know whether Japan is
ready to assume a larger responsibility as the lender of last resort in the region. Indeed, the
Japanese proposal consisted in providing a finite amount of US dollars as emergency loans,
whereas East Asian countries expect Japan to provide access to emergency yen liquidity.
Besides these rejected proposals, there were several more successful initiatives towards
closer monetary cooperation. In November 1997, a conference of deputy finance min-
isters and central bank governors from 14 mostly Asian countries was held in Manila,
and a “New Framework for Enhanced Asian Regional Co-operation to Promote Financial
Stability”—the so-called Manila Framework Group (MFG)—was created. This forum was
established in the aftermath of the failed attempt of the AMF. The MFG centers around
four objectives: (i) regional surveillance; (ii) technical assistance in strengthening domestic
 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110 95

financial systems; (iii) strengthening of the IMF’s capacity to deal with financial crisis; (iv)
a contingent financing arrangement for Asian currency stabilization. Since the MFG circle
of members is largely identical with that of the The Asia-Pacific Economic Cooperation
(APEC)2 —including representatives of the IMF and the World Bank, but excluding the
South American APEC members—, its efficiency can be called into question. At any rate,
the MFG did nothing to solve the Indonesian and Korean currency crises that manifested
themselves during and after the foundation of the “framework group”.
In October 1998, the ASEAN finance ministers decided to establish the ASEAN Surveil-
lance Process (ASP). The purpose of the ASP is to promote policy dialogue based on the
principles or peer review and mutual interest among ASEAN member countries. It can be
viewed as a regional crisis prevention tool based on two elements: the first element is a mon-
itoring system that allows early detection of any irregular movement of key economic and
financial indicators; the second element—the so-called peer review—concerns appropriate
policies to address issues emerging from the monitoring exercise. In November 1999, the
ASP was extended to involve China, Japan and South Korea, thus making “ASEAN + 3”
reality in financial surveillance.
In May 2000, the Chiang Mai Initiative was launched. It aims at developing a network
of bilateral swap agreements (local currency to US dollar or Japanese yen) among North-
east Asian countries, and between one of the latter and one of 10 ASEAN countries, as
well as strengthening an intra-ASEAN swap agreement. As of May 2002, bilateral swap
agreements between Japan, on one side, and Korea ($ 7 billion), Thailand (US$ 3billion),
Malaysia (US$ 3.5 billion), Philippines (US$ 3 billion), and China (US$ 3 billion equiva-
lent) have been concluded. The ASEAN swap agreement was also enhanced to cover all the
10 member countries. The CMI represents the first, albeit modest step, towards establishing
a coordinated intervention policy and regional currency arrangement, but it seems to be
more a case of “pooling reserve” than a commitment to bilateral intervention to stabilize
regional bilateral exchange rates. In other words, even though financial cooperation has
seen some progress in East Asia, incentives for monetary cooperation continue to be weak.
All the existing political initiatives are conditioned by the Asian currency crisis. Their focal
point is the prevention and management of possible future financial crises.
Furthermore, it is noteworthy that regional financial arrangements have traditionally
tended to follow the creation and implementation of trading arrangements. In East Asia,
paradoxically, the financial proposals are moving faster than any serious intention of trade
and investment cooperation. However, there has been increase in intra-regional trade ties
in the late 1990s. Recently, several attempts towards bilateral and multilateral free trade ar-
rangements have been observed outside ASEAN3 Free Trade Arrangement (AFTA). In Oc-
tober 2002, Japan and Singapore concluded a “new age” free trade agreement that includes

2 The Asia-Pacific Economic Cooperation (APEC) was established in 1989. It has now 21 members: Australia,

Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand,
Papua New Guinea, Peru, the Philippines, Russia, Singapore, Chinese Taipei (Taiwan), Thailand, the United States
of America and Vietnam.
3 Association of South East Asian Nations (ASEAN) was established in 1967, with Indonesia, Malaysia, the

Philippines, Singapore and Thailand as its founding members. It was later extended to include Brunei Darussalam
and, since the 1990s, Vietnam, Laos, Myanmar and Cambodia.
96 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110

mutual recognition on licensing procedures and support for increased worker mobility be-
tween the two countries.4 Korea and Japan have also began to discuss a free trade agreement.
On the other hand, China has proposed a free trade agreement between China and ASEAN.
However, the ASEAN countries would rather prefer an “ASEAN + 3” free trade arrange-
ment, which would also include Japan and Korea.
At any rate, there is a trend towards a new regionalism in Asia, in which plans for
intra-regional groupings, such as ASEAN + 3, gain greater relevance than Pan-Pacific co-
operation in the APEC. So far, free trade arrangements are clearly preferred to other, closer
arrangements. Nevertheless, a change in the attitudes of Japan and China is striking. Both
countries seem to be more resolute about an intra-regional grouping than before. A shift of
the center of gravity of political initiatives from the South East to the North East is already
observable. Given the slowness of progress within AFTA and the importance of the North-
east Asian economies in terms of size, weight in the region as well as their limited number,
a free trade arrangement between China, Japan and Korea could be achieved prior to wider
agreements in the style of ASEAN + 3. Moreover, since it is difficult to imagine an East
Asian free trade area in which the big economies to the North do not participate, an arrange-
ment between the Northern countries is a necessary condition for a wider solution. Thus
China, Japan and Korea would have to play leading role in East Asian economic integration.
This expansion in regional trade is expected to produce market pressures for stabilizing
bilateral exchange rates of East Asian currencies. Policymakers of these countries have
realized that stabilizing regional exchange rates would help promote regional economic
integration. This interest in regional development and growth has naturally led to the search
for a collective exchange rate mechanism.
In order to assess the potential for such cooperation it is useful to take a step back and
discuss the relevant options of exchange rate policy in a more general fashion.

3. The choice of exchange rate regimes for small economies

The financial crises that successively hit emerging market economies in the 1990s (Mex-
ico in 1994, East Asia in 1997, Brazil and Russia in 1998) have lent support to a new view on
the optimal choice of exchange rate regime for small open economies, according to which
only the two corner solutions are feasible. In a world of high capital mobility, most countries
have little alternative but to float their currencies or peg them extremely hard to one of the
key currencies (Eichengreen, 1999). The argument is based on Mundell’s impossible trinity:
in a world of high capital mobility, nominal exchange rate pegs cannot be sustained without
giving up independent monetary policy, either implementing a currency board or adopting
the dollar (or the euro). In one of the earliest statements defending this view, Obstfeld and
Rogoff (1995) stressed that a fixed exchange rate was costly if the government’s promise

4
“New age” agreements go beyond traditional agreements in that they focus on new issues such as: “rules
governing foreign investment, e-commerce regulations, trade in services, harmonization of technical standards,
sanitary and phyto-sanitary regulations, and the streamlining of customs procedures”; see Hertel, Walsley and
Itakura (2001).
 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110 97

not to devaluate lacked credibility. Thus, the only other viable choice for the government
concerned is to float its currency.
However, none of the two corner solutions may be advisable for emerging market
economies, since both carry high risks and costs. Hard pegs lead to the loss of some useful
functions of the central bank, such as last resort lending, and expose the country in ques-
tion to speculative attacks, as happened during the Asian crisis. If they are widespread and
uncoordinated, there is an increased risk of contagious collapse. If, on the other hand, they
are the exception rather than the rule, they tend to have strongly damaging effects because
the country in question faces competitive depreciation in its liberalized sectors and export
markets, as demonstrated by the case of Argentina. The alternative of free floating is not
much more attractive, since it tends to expose developing countries to high exchange rate
volatility, which has adverse effects on trade and investment. There is clear evidence of
the negative impact of real exchange rate volatility on imports and exports. In particular,
domestic investment is adversely affected because, due to its longer-term orientation, it is
more sensitive to uncertainty.
In addition, there is growing empirical evidence that actual exchange rate policies adopted
by developing countries do not exhibit corner solutions. Many countries claim to be floating
but do actually manage their exchange rate with interest rate or market interventions. Thus,
many regimes classified as free floats in the IMF annual report on exchange rate arrange-
ments (1997), are in fact managed. When exchange rate regimes are considered de facto
rather than de jure, the conclusion emerges that many countries run intermediate regimes,
mostly in the form of dirty floats or soft pegs (Bénassy-Quéré and Coeuré, 2000, 2002).
That is why the IMF has corrected its classification in 2000.5 This raises the question why
so many emerging market economies are reluctant to let their exchange rates float freely.
The “fear of floating” (Calvo and Reinhart, 2000) can be understood as the perception by
developing countries that free floating leads to exchange rate volatility that is unrelated to
macroeconomic fundamentals and translates itself into increases in the local risk premium.
The underlying problem is a lack of credibility that makes exchange rate depreciation
costly for developing countries. Even a modest depreciation can lead to a total loss of
confidence, barring access to international capital markets. As a consequence, developing
country floaters have to hold large stocks of foreign exchange reserves relative to monetary
aggregates. Their interventionist stance can thus be interpreted as a way to establish some
credibility.
Given that hard pegs are doomed to fail, and free floats are undesired, intermediate op-
tions appear to be the most pragmatic solution of the day, despite the widespread opinion
that they are not viable in the context of high capital mobility (Eichengreen, 1999). In
an unstable world economy, emerging market economies—specially the outward-oriented
economies—should preserve the ability to combine exchange rate stability and flexibility
as economic environment changes. The stability permits to elude the adverse effect of un-
certainty on real economy, while the flexibility allows avoiding speculative attacks. From
this point of view, the target zone system or a peg with bands seems to be the suitable

5 In the classification of the IMF (2000), adjustable pegs, crawling pegs, regimes with fluctuation bands and

managed floats are considered as “intermediate regimes”, while currency boards, dollarized regimes and currency
unions are grouped into “hard pegs”.
98 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110

system and, it is supposed to provide enough stabilizing effect (because of the presence of
the band) with a fair amount of flexibility. Nonetheless, it involves also several practical
difficulties namely, the problem of determination of the central rate; the issue of the con-
ditions and frequency with which the latter may have to be changed, and the conditions
under which the currency should be defended. But the main disadvantage of the traditional
target zone system is that of speculative attacks, as experienced by EMS in 1993. When-
ever exchange rates get close to the edges of their pre-announced bands, speculators are
tempted to test the commitment of monetary authorities to defend the exchange rate tar-
get. The interventions in defense of the exchange rate parity are necessarily followed by
a shift to the laisser faire as soon as the exchange rate goes over the edge, with a sharp
depreciation of the currency as a result. Another possibility is to introduce crawling pegs.
In such a system, the monetary authorities assume the obligation to maintain the exchange
rate within a wide, publicly announced bands around parities that are periodically adjusted
in relatively small steps in order to keep the band in concordance with the fundamen-
tals. Yet this scheme, too, has the drawbacks of the declared targets that invite speculative
attacks.
In recognition of these weaknesses of traditional intermediate regimes, an interesting
solution is the monitoring band advocated by Williamson (1998). Here, there is no obligation
for monetary authorities to defend the edge of the (narrow) band in question. They may
intervene to prevent the rate from straying too far from the band, but they are free to decide
whether and how to do it. The exchange rate may even be allowed to go temporarily outside
the band if necessary. The point of such a policy is to allow the exchange rate to fluctuate
in a wide band over the short term while keeping it on average within a narrow band over
longer term. The main difference between the managed flexibility à la Williamson and
the old-style target zone is the degree of commitment. Williamson’s modified intermediate
regime may be more effective than old systems in reducing vulnerability to speculative
attacks but it is criticized as the old ones. The first problem is that a reference rate or an
equilibrium exchange rate cannot be easily defined. Another criticism is that it does not
provide an explicit nominal anchor. Finally, there is the problem that it may not still be
flexible enough to deal with large and unexpected shifts in capital movements and investor
expectations.
The preceding discussion of the viability of various intermediate exchange rate regimes
sheds light on the weaknesses of individual options. Intermediate regimes could be more
robust if they were conditioned by longer-term plan for monetary integration and handled
within regional context.
The first issue is to determine the operational exchange rate mechanism leading to mone-
tary integration, as far as the latter is a long-run scheme. Bénassy-Quéré and Coeuré (2000)
indicate that the perspective of long-run regional co-operation modifies the terms of the
choice of an exchange rate regime for small currency countries. First of all, the unilateral
two corner solutions may become an obstacle if the long-run objective is monetary inte-
gration. On the one hand, free floating may induce non-cooperative strategies, particularly
when the region faces a common shock. On the other hand, hard pegs are almost irreversible
because they lack an exit strategy. The perspective of monetary unification in the long run
can make intermediate regimes more effective in the mean time, when these regimes are
accurately defined and managed through regional co-operation.
 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110 99

Another important issue is that of the common peg. A choice has to be made between
an internal or external monetary anchor. In the case of an external nominal anchor, a co-
ordinated action by applicant countries of the region concerned is necessary to peg their
small currencies against a key currency or a common basket of major foreign currencies.
The choice of the anchor currency should be made focusing on the trade relationship, the
anchor country has to be the prominent partner outside the region. Choosing an exter-
nal anchor means also adopting the corresponding monetary policy and, for that reason,
there should not be too much asymmetry with the anchor country. However, the external
common peg solution has the same drawback as the individual case. The anchor currency
country has no given incentive to commit itself to monetary stability in the region. If its
monetary policy may be completely out of step with the region’s requirements to stabilize
economic activity in nominal and real terms, the whole system of cooperation would be put
at risk.
An alternative to external anchor currency would be to form monetary unions inde-
pendently from key currencies. It would create stable regional environment while allow-
ing key currencies to float against regional currencies. That is why the common peg has
to be chosen among regional currencies or has to be formed by a basket of national
currencies. The monetary integration does not imply necessarily to adopt a single cur-
rency; it depends on the degree of political willingness to take on the shared monetary
sovereignty.
It is noteworthy that regional monetary co-operation is supposed to be costly for par-
ticipating countries. It requires loss of monetary sovereignty or at least coordination of
macro-policies—particularly, homogeneous preferences are needed as far as monetary pol-
icy is concerned—and a high degree of political and institutional commitments. The process
of monetary unification is at first a political more than an economic decision and it needs
consensus among applicant countries. We consider as prime concern the existence of an
economic and political leadership to the extent that it may have stabilizing effect. The
leader country can require some co-operation from its partners while supporting most of
the unification process’ costs. The leader country has to act as regional lender at last re-
sort, defending national currencies against speculative attacks if necessary and undertaking
the exchange rates stability within the region. The lending at last resort function is also
important in creating and reinforcing political links.
Finally, the most important topic in the context of monetary cooperation is its sustain-
ability in terms of the underlying structures of trade, production, finance and political
institutions. The demand for regional exchange rate stability becomes decisive as soon as
intra-regional trade flows and capital flows begin to outweigh the region’s outflows and
inflows. However, trade and financial integration are necessary but not sufficient condi-
tions for monetary cooperation. Cooperation in the sense of giving up on intra-regional
exchange rate flexibility could carry considerable social costs, if the sub-regions are hit by
asymmetric shocks. As is well known from the standard literature on Optimum Currency
Areas (OCA), the adjustment costs are negligible only if there is enough real convergence
of the sub-regions to make shocks symmetric, or if there are compensating mechanisms
such as labor mobility, wage flexibility, or fiscal transfers. Thus the next task is to examine
in how far East Asia is ready for monetary cooperation, or even monetary integration, in
these terms. For this, we will first discuss the general characteristics of the economies in
100 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110

East Asia (next section). Thereafter we will discuss in how far East Asia fulfils the standard
OCA criteria (section 5).

4. Structural characteristics of East Asian economies

Discussions about regional economic and monetary cooperation in East Asia began long
before the Asian currency crisis. The main concern was the dependence of the region on
trade with the highly industrialized economies in Japan, North America and Europe. Due to
their strong export orientation, most Asian economies were extremely sensitive to changes
of the external environment. Each country competed with the others on global markets,
and without any regional economic division and coordination hostile competition adversely
affected their trading conditions and lead, at times, to competitive devaluation or strong
trade deficits, with significant economic fluctuation as a consequence. On the other hand,
the disparities in economic development, ethnicity, religion and the social and political
systems were regarded as obstacles to successful regional cooperation in East Asia.
As mentioned before, the Asian financial (and subsequently economic) crisis has changed
opinions, and now there are calls for monetary cooperation to provide sustainable exchange
rate policies in the region. In the following, the point is to determine the extent to which East
Asian countries can be regarded as a suitable grouping for monetary cooperation. For this
purpose, it is important to investigate the general characteristics of East Asian economies.
East Asia is characterized by a notable diversity in terms of size, levels of economic
development, industrial structures, depth of financial markets, exchange rate regimes and
preferences in economic policies. At one extreme, Hong Kong SAR and Singapore are city
states, with small populations and high per capita incomes. Japan is clearly the leading
economy in the region, but even South Korea and Taiwan POC are relatively large, highly
competitive industrial powers. At the other extreme, China, Indonesia, the Philippines and
the recent ASEAN members—i.e. Cambodia, Laos, Myanmar and Vietnam—are relatively
populous, agricultural and poor countries.6 Brunei Darussalam, Indonesia and Malaysia are
oil exporters, while most other countries are oil importers. In the middle—in terms of per
capita incomes—are Malaysia and Thailand (see Table 1). In terms of industrial structure,
some degree of homogeneity is noticeable for Japan, Hong Kong, Singapore and South
Korea on the one hand, and for Thailand, Malaysia, the Philippines, Indonesia and China
on the other hand.
Asymmetry in financial development is also perceptible. The degrees of financial
deepening—evaluated from the ratio of money plus quasi money to GDP—give some indi-
cation (see Table 2). In most of the countries, capital markets are underdeveloped. Indirect
financing prevails, but the banking systems in the region are considered as fragile and suffer-
ing from non-performing loans. At least, this has been the case in Japan since the early 1990s
and in the other countries since the crisis in 1997. On the other hand, most of the East Asian
countries show high saving rates and own extensive foreign exchange reserves. But there are
few large capital markets. In addition, financial markets are open to different degrees. The

6 Furthermore, it should be noted that China and Vietnam are transition economies still dominated by
state-owned enterprises and banks.
 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110 101

Table 1
GDP per capita, purchasing power parity (current international US dollar)
China Japan Korea Hong Kong Singapore Thailand Malaysia Indonesia Philippines

1980 465 9885 2988 6896 5894 1482 2412 871 2459
1985 839 13079 4791 9730 7602 2072 3280 1244 2435
1990 1400 19913 8923 16665 12843 3863 4763 1960 3368
1995 2681 23725 13759 22166 19406 6260 7491 2911 3633
1996 2940 25115 14706 23330 20184 6715 8140 3120 3759
1997 3154 25373 15307 23565 20547 6575 8573 3218 3871
1998 3342 24314 14097 21264 19511 5847 7661 2791 3706
1999 3617 24898 15712 22090 20767 6132 8209 2857 3805
Source: World Bank database.

financial markets in Japan and in the NIEs (Korea, Taiwan, Singapore and Hong Kong) are
completely open, while the other countries have only opened their current accounts. Among
financial markets in East Asia, Hong Kong is the only highly internationalized market, the
other markets are largely limited to their national boundaries.
Exchange rate regimes also differ. Since the Asian crisis, most countries in the region
have officially gone on floating, while China has openly regulated floating and Hong Kong
has a hard peg in its US dollar oriented currency board.
In addition there are diverse preferences in economic and trade policies. For instance,
Hong Kong follows a liberal economic policy of high openness, whereas Japan is more
inclined to use protective trade policy. Selective mixes of export orientation and import
barriers also characterize many other countries in the region. Similarly, basic outlooks on
market structures vary a lot. In Taiwan, policies are implemented to promote economic
liberalization and competition of small and medium-sized firms. Korean practice is rather
to organize large enterprise groups and corporation groups.
Hong Kong, Singapore, but even Malaysia can be characterized as “super traders”, i.e.
small economies for which the trade volumes amount to several times their GDPs (see
Table 3). Japan, on the other hand, is a big and less open economy. All other countries have
high trade shares, compared to the international average.

Table 2
Financial depth as percentage of GDP
China Japan Korea Hong Kong Singapore Thailand Malaysia Indonesia Philippines

1980 33.2 83.4 29.0 57.7 34.5 46.1 13.2 22.7

1985 47.3 91.9 32.4 71.0 53.5 61.2 21.2 26.7
1990 70.3 110.8 35.5 83.6 62.4 63.1 34.0 31.0
1995 92.4 112.0 40.8 164.8 81.0 73.2 85.0 43.1 45.4
1996 100.9 110.9 42.6 166.2 80.6 75.0 83.3 46.9 48.8
1997 112.8 111.8 42.1 165.3 83.8 85.3 90.4 39.8 55.8
1998 126.0 118.4 52.0 190.7 102.6 98.2 96.0 46.3 584
1999 138.3 123.7 60.7 214.1 116.4 104.0 97.9 54.0 58.9
Source: World Bank database.
102 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110

Table 3
Trade as percentage of GDP (imports plus exports as a share of nominal GDP)
China Japan Korea Hong Kong Singapore Thailand Malaysia Indonesia Philippines

1980 15.5 28.3 74.4 180.7 439.0 54.5 111.0 54.4 52.0
1985 24.1 25.6 66.1 208.7 338.0 49.2 103.2 43.0 45.8
1990 31.9 20.7 59.4 260.1 397.0 75.8 147.0 49.1 60.8
1995 45.7 17.3 61.9 303.2 338.8 90.3 192.1 54.0 80.5
1996 39.9 19.3 63.1 285.7 327.3 84.7 181.8 52.3 89.8
1997 41.4 20.9 70.5 268.5 94.5 185.7 56.0 108.3
1998 39.2 20.2 85.5 257.0 101.3 208.6 92.9 110.3
1999 41.3 19.1 77.4 261.2 102.2 218.3 61.8 101.4
Source: World Bank database.

This diversity in East Asian economies may create tensions in regional cooperation, in its
objectives and in the members’ gains and losses from cooperation. In particular, asymmetry
in financial development may be an argument against a common peg. This observation
has to be qualified to the extent that South East Asian countries—particularly ASEAN
countries—show some similarity in their economic characteristics, whereas North East
Asian countries are less homogeneous.

5. Is East Asia an optimum currency area?

Let us now consider the collective characteristics of East Asian economies in terms of
their readiness for monetary integration on the basis of the OCA criteria. Thus we will
analyze in how far East Asian countries—or a subset of them—constitute an adequate
grouping for the use of a single currency or hard pegs of their currencies vis-à-vis each
other. As seen earlier, the OCA main criteria are: factor mobility, openness and economic
interdependence of member countries, and symmetry of shocks affecting countries in the
region.
Concerning factor mobility, comprehensive data for labor mobility are not easy to obtain,
but Goto (2002) has highlighted several related facts. He finds that, while the degree of
labor market integration is rather low in East Asia relatively to that in North America or in
Europe, it had been rapidly increasing in the 1990s, at least until the Asian crisis. Intra-Asian
migration rose from 1 million in the early 1980s to 6.7 million in 1997. Major host countries
include Japan and the NIES, while Indonesia and the Philippines are major exporters of
migrant workers. Korea, Malaysia, and Thailand are both exporters and importers of migrant
workers. This increasing trend of intra-Asian migration was suddenly, but perhaps only
temporarily, suspended by the Asian crisis in 1997, in the wake of which most countries
have been suffering from negative economic growth and high unemployment. As a result,
there have been changes in government policies towards migration in both receiving and
sending countries. While receiving countries—such as Korea, Malaysia, Singapore and
Thailand—took restrictive measures to reduce immigration, sending countries—such as
 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110 103

Table 4
Matrix of FDI inflows in East Asia (1996, million US$) (total East Asia: world share in brackets)
From To

Japan Asian NIEsa ASEAN 4b China East Asiaa

Japan – 2190 15734 3679 21603

Asian NIEs 1200 726 14446 27753 42925
ASEAN 4 11 683 3211 932 4826
China 5 6 109 – 115
East Asia 1215 (17.8) 1415 (14.6) 17766 (35.0) 28686 (68.7) 47867 (46.8)
World 6841 9718 50800 41726 102243
Source: Igawa (2002).
a Korea, Singapore, Taiwan.
b Indonesia, Malaysia, Philippines, Thailand.

Indonesia, the Philippines, and Thailand7 —strengthened their efforts to increase emigration
so as to lower unemployment in their countries.
On the other hand, capital mobility is high in East Asia. Moon et al. (2000) indicate that
the ratio of Foreign Direct Investment (FDI) inflow to regional GDP was the highest in
East Asia (1.56%), followed by the EU (1.26%) and the NAFTA (1.10%) in the mid-1990s.
The ratios of outflow to regional GDP show the same order: 1.74% in East Asia, 1.59% in
EU, and 1.16% in the NAFTA. Flows of FDI within the region were especially strong in
the 1990s. Table 4 shows that although Japan has been the major source of the investment,
recently the NIEs supply a larger share of FDI in East Asia than Japan.
Concerning trade openness and dependence, Goto and Hamada (1994) analyzed the
degree of interdependence among East Asian countries and showed that, in 1990, trade
linkage among East Asian countries as a whole was high. They used the “trade dependency
index”, which is defined as the amount of exports and imports of a country with a particular
partner as a percentage of the country’s GDP. When Goto (2002) updated the data up to
1999, he found that the average value for the index had further increased, confirming the
high importance of intra-regional trade. Table 5 summarizes these results.
Table 5 shows that trade dependency with East Asia has been increasing in almost every
country, which lends further support to our earlier remarks on trade openness in East Asia
(see also Table 3). As expected, the “supertraders” Singapore and Hong Kong display very
high index values. However, it should be noted that the trade dependency of Japan on East
Asian countries does not show any increase. In 1999 the index was even lower than in 1980.
In order to analyze trade interdependency in greater depth, Goto (2002) has measured the
bilateral trade linkages and compared East Asian countries with European Union member
countries. He used the “trade intensity index”, defined as follows:

Ii,j = (Ti,j /Ti )/(Tw,j /Tw )

7 Thailand is both a receiving and sending country, and the Thai authorities took restrictive policies towards
immigration and encouraged the outflow of Thai workers.
104 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110

Table 5
Trade dependency index, East Asia 14 as partner
Reporters 1980 1985 1990 1995 1996 1997 1998 1999

Brunei 17.0 27.2 33.6 59.9 62.0 62.4 33.9 36.4

Cambodia – – 5.4 53.5 48.7 39.0 41.9 52.7
China 3.4 5.2 14.7 14.3 12.4 13.3 11.4 12.0
Hong Kong 47.4 71.2 106.6 138.2 130.9 123.7 117.1 121.7
Indonesia 7.6 6.0 9.9 11.4 12.0 13.7 27.1 23.4
Korea 6.1 7.2 6.8 12.7 13.6 15.8 18.8 17.6
Laos – 1.9 18.3 31.3 34.8 24.4 43.3 45.1
Malaysia 26.8 30.4 49.7 62.4 61.1 62.4 70.2 78.5
Myanmar 4.4 2.2 2.2 2.2 1.7 1.4 0.9 0.9
Philippines 6.9 8.5 11.0 16.7 15.9 22.6 29.1 30.0
Singapore 140.2 107.6 112.0 130.6 125.9 124.9 112.9 122.7
Taiwan 12.8 10.8 14.7 24.1 23.5 25.0 23.8 25.6
Thailand 11.6 11.3 15.8 21.8 20.4 24.0 26.1 29.7
Vietnam – 1.0 23.0 38.0 45.8 43.5 38.0 38.8
Average of above 25.9 22.4 30.3 44.1 43.5 42.6 42.5 45.4
Japan 6.5 5.8 5.1 6.0 6.6 7.0 6.1 6.2
USA 2.1 2.0 2.8 4.1 4.1 4.2 3.9 4.1
Source: Goto (2002).

where Ii,j is the index of trade intensity between country i and country j, Ti,j is the trade
volume of country i with country j, Ti the total volume of country i, Tw,j is the total volume
of the world with country j, and Tw the total volume trade of the world.8 If the degree of
trade interaction between countries i and j is equal to that between the world and country
j, then the index is equal to unity. The higher the index, the more closely the two countries
are interrelated by trade. It was found that intensity was high in many trading pairs in East
Asia, frequently exceeding the corresponding data in European pairs. Table 6 depicts the
results for East Asia in 1999. We can observe a number of pairs that had particularly intense
trade interaction, with intensity indices exceeding four in as many as 21 cases.9 It should
also be noted that Japan’s trade intensity with East Asia is higher than the USA’s trade
intensity with East Asia. In short, we may conclude that intra-regional trade dependency is
quite high in East Asia.
Finally, as far as the symmetry of exogenous real shocks is concerned, empirical studies
show that East Asian economies do not greatly differ from EU countries in this respect.10
Goto (2002) stresses that the real disturbances of a subset of Asian economies—i.e. Indone-
sia, Korea, Malaysia, the Philippines, Singapore, and Thailand—are highly synchronized,
and that the synchronization of these countries with Japan increased in the 1990s. The syn-
chronization with Europe shows, to some extent, a trend similar to that in synchronization

8 The index is normalized by dividing by the relative share of the country in the total world trade in order to
eliminate the effect of the mere size of the country concerned.
9 Goto (2002) found that in EU those indices exceed four only in seven cases.
10 To test for the homogeneity of the real disturbances in the Asian region, Eichengreen and Bayoumi (1999)

used the structural VAR methodology, whereas Goto and Hamada (1994), Goto (2002) chose principal component
analysis. Although they used different methodologies, their results are similar.
 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110
Table 6
Trade intensity index for East Asian countries (1999)
Brunei Cambodia China Hong Kong Indonesia Korea Laos Malaysia Myanmar Philippines Singapore Taiwan Thailand Vietnam

Brunei 0.1 0.2 0.4 4.3 3.5 0.0 6.7 0.2 0.4 8.2 0.2 8.8 0.1
Cambodia 1.2 2.3 2.3 1.3 1.2 1.2 0.3 0.2 9.3 2.7 14.4 84.2
China 9.1 1.8 2.7 1.1 0.8 4.7 0.8 1.2 0.9 1.1 1.9
Hong Kong 0.9 1.6 0.4 1.2 1.0 1.7 2.0 4.6 1.46 1.0
Indonesia 3.4 0.3 0.1 7.2 1.6 5.6 2.1 2.9 4.6
Korea 0.6 1.8 2.7 2.5 1.7 1.8 1.2 3.4
Laos 0.1 0.0 0.0 2.4 0.4 50.9 21.3
Malaysia 6.4 2.8 11.2 2.2 3.5 2.1
Myanmar 0.5 7.7 2.0 0.0 0.0
Philippines 3.7 3.8 2.6 1.9
Singapore 2.1 4.9 4.6
Taiwan 2.0 3.9
Thailand 4.2
Vietnam
Japan 4.7 0.3 2.5 1.6 3.3 2.5 0.6 2.3 1.3 3.0 1.8 2.9 3.0 2.5
USA 0.8 0.6 1.0 1.1 0.9 1.4 0.1 1.2 0.5 1.6 1.2 1.5 1.1 0.3
Source: Goto (2002).

105
106 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110

with Japan. The correlation with the USA, on the other hand, was negative both in the 1980s
and 1990s. On the basis of these findings, Goto suggests that East Asian economies appear
to be plausible candidates for monetary cooperation, and that pegging to a basket of key
currencies (yen, euro and US dollar) would be better than pegging to the US dollar.
Given the fact that the correlation of macro-economic variables may be influenced by a
shift in the exchange-rate system, Kwan (1998b) has focused on the correlation of economic
structure and of policy objectives, which are less dependent on the exchange-rate system. As
far as the degree of similarity in the economic structures of two countries can be evaluated by
the degree of competition or complementary in the trade structures, he uses the correlation
coefficient of trade structures and, identifies two groups of East Asian countries among
which economic structures are significantly correlated. The first group includes Japan and
Asian NIEs, and its correlation coefficient is 0.45; the second group includes ASEAN 4
and China, and it shows up a coefficient equal to 0.46. This is close to the corresponding
coefficient of 0.52 for the Euroland countries. Besides these empirical studies, the recent
Asian crisis revealed that financial disturbances can overrun the financial and exchange rate
systems, and affect the real economy in a similar way. That is why financial shocks should
henceforth be considered as a significant source of symmetric shocks.
Accordingly, empirical studies suggest that East Asian countries may not constitute an
OCA as a whole, but that they do so at least partially. It may be interesting to indicate which
subset of countries could form an acceptable OCA (Saucier, 2002). Two distinct groups
satisfy at present the OCA criteria of factor mobility and trade: Japan and the Asian NIEs
on the one hand, and China and ASEAN 4 on the other. Hence it might be feasible to form
an initial core of countries participating in hard pegging or monetary union, to be enlarged
progressively, as experienced in the European union.
Nevertheless, it may be argued that the OCA criteria are endogenous, i.e. it is likely that
the very act of forming a monetary union contributes to foster an OCA and, thereby, to
intensify trade linkages and similar economic structures (Frankel and Rose, 1997; Saucier,
2002). If that is the case, less emphasis should be put on prior convergence conditions and
more on strengthening the monetary institutions and stirring up political willingness.11

6. Is monetary unification part of East Asia’s future?

What are the options of monetary cooperation for East Asia? Generally speaking, ex-
change rate policy may be assigned various objectives, such as preventing crises, keeping

11 It is noteworthy that this argument need to be specified and, according to an anonymous referee, if the
formation of a monetary union produces structural changes that will eventually bring about OCA criteria, then a
cost-benefit analysis of the establishment of currency union must take the time period into consideration, during
which the OCA criteria are not satisfied, but a currency union has been established. Since so far there is little
empirical evidence that the establishment of currency union will lead to the required structural changes rapidly, it
is obvious that during this adjustment phase—which would require many years—the monetary union cannot be
considered as an OCA, and it operates sub-optimally, thus accumulating economic costs. These costs must be taken
into consideration when assessing whether currency union is indeed desirable. Only if there is evidence that any
adjustment would be quick and costs would be low, could one consider that less emphasis should be put on prior
convergence conditions and more on strengthening the monetary institutions and stirring up political willingness.
 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110 107

the balance of payments in equilibrium, promoting growth of real output, regional trade
and investment, or reducing uncertainty and transaction costs generated by exchange rate
volatility. Of these objectives, it seems that crisis prevention has been exclusively empha-
sized in most of the recent literature, given the turmoil created by the currency crisis of
1997. Even though prevention is important, the exclusive focus on this goal may not serve
the best interest of the East Asian countries in the long run. Since controlling speculative
attacks and subsequent contagion is complex, it may not be rational to allocate this task to
exchange rate policy alone, without any further regional cooperation. A possible option is
monetary union that would eliminate internal exchange rate risks (aggravated by “beggar
thy neighbour” and other non-cooperative strategies), but would also require a considerably
higher degree of coordination in different fields of macroeconomic policy. However, the
case for an Asian monetary union—as a strong form of monetary cooperation—has been
found to be weak by a number of authors (e.g. Bayoumi and Eichengreen, 1999) and could
be considered as an option only for the long run (Nicolas, 2002). Monetary unification of
East Asia is rejected on political rather than strictly economic grounds.12 Political will-
ingness and commitment are needed to shift from dollar oriented economies to a regional
grouping where exchange rates could largely become a matter of benign neglect.
What would be then the most appropriate exchange regime for East Asia in the meantime?
Reduced credibility, lack of banking restructuring and financial fragility, insufficient in-
ternational reserves suggest that a return to hard pegs encourages future speculative attacks,
while a shift to currency boards may avoid them. However, currency boards run the risk of a
financial system crisis by eliminating the lender at last resort function of monetary authori-
ties. Pure floats are an option but may be excessively volatile, considering the fundamental
uncertainty about appropriate exchange rates. By the process of elimination, managed float,
à la Williamson specifically, emerge as the most appropriate medium-term regime. This
allows the monetary authorities to play a coordinating role for expectations, while not pre-
senting obvious targets for speculative attacks. However, this intermediate regime should
be managed through regional cooperation in the perspective of monetary integration in the
long run. In that case, two issues must be addressed: which country should lead the monetary
cooperation; which currency should be chosen as the anchor currency.
The crucial point would be the determination of leadership towards Asian monetary
cooperation. Which country (or countries) would assume this role, given that it contains
responsibilities and constraints? Given the structural crisis in Japan since 1990 and the
relative underdevelopment of China,13 there is no clear answer to the leadership question.
Moon et al. (2000) argue that, even though Japan has started to get more involved in securing
the region’s prosperity and growth, it is not ready to assume the role of a lender of last resort
and other responsibilities of coordination. More importantly, China is believed to be opposed
to Japan’s leadership. As has been argued, Sino-Japanese concord is of the essence for further
regional cooperation, and this applies to monetary integration even more than it does to trade.

12 Bayoumi and Eichengreen (1999) as well as Bayoumi et al. (2000) have argued that regional exchange rate

pegs could even be “dangerous”, if “the requisite political commitment” is lacking.

13 The recent China’s rapid economic growth and enforcing trade and investment links with ASEAN countries

(and even with Korea and Japan) have aroused speculation that China will sooner or later replace Japan as the
leading economic power in East Asia.
108 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110

While there is, nevertheless, some consensus in the literature about the necessity of
regional monetary cooperation, opinions are divided concerning the choice of the anchor
for the envisaged exchange rate system. As Kwan (1998b) stresses rightly the theory of
OCA is useful in identifying potential members for monetary integration, but it has little
to say about which currency should serve as the common currency. The choice between
external or internal anchor currency is strategic, and depends on the long-run prospects
and political commitment. In the case of an external anchor currency, coordinated action
by East Asian countries could stabilize their currencies against a common basket of key
currencies that is representative of their average structure of trade and FDI. The common
basket would include the US dollar, the euro, and the yen. This option was suggested mainly
by Williamson (1999), Bayoumi, Eichengreen and Mauro (1999), and Kawai and Takagi
(2000), but it has the serious weakness that no country of the three will consider itself as
the anchor country and will assume the role of lender at last resort.
The internal anchor, is an interesting option because it may lead to further economic
policy coordination and monetary cooperation. There are then two options as regards the
internal anchor: the Japanese yen or a basket of regional currencies. The choice of the
Japanese yen as currency anchor and forming a yen bloc seems to be gaining more interest
after the currency crisis. There are economic reasons for other Asian countries to peg their
currencies to the yen (Kwan, 1998a). The increasing Japanese trade and financial power has
given a fast rise to its status in foreign trade and financial transaction, and Japan is replacing
the USA as the core and dominating force in economic, trade and financial activities in
East Asia. East Asian countries are highly dependent on Japan in foreign trade, investment
and financial transactions. From the Japanese point of view, East Asia now absorbs 40% of
its total exports and, if Japan could form a kind of monetary union with Asian countries,
its economy would be less vulnerable to fluctuations in yen/dollar rate. However, although
Japan is the largest economic power in Asia, with its GDP accounting for more than that
of the ASEAN, China and Korea combined, the yen is not yet internationalized enough to
compete with the US dollar as a regional medium of exchange. Moreover, Japan’s trade
structure is similar to those of the Asian NIES but differs from those of ASEAN countries
and China. This heterogeneity in economic structure suggests that Japan, the Asian NIES,
the ASEAN countries and China do not form an OCA. Finally, the yen option does not seem
politically feasible, given the strong opposition—not only from the USA but also—from
other Asian economies in fear of Japanese hegemony. The more appropriate alternative
might be to construct a basket only on the basis of regional currencies (“Asian Currency
Unit”), in a fashion similar to the construction of the European Currency Unit. Given the
economic and political context of East Asia, this option is recommended by a growing
number of economists (see for example Kwan, 1998b, Moon et al., 2000 and, Saucier,
2002).

7. Concluding remarks

Since the Asian currency crisis of 1997, interest in regional monetary cooperation has
been salient, and the major economic characteristics of East Asian economies have shown
good conditions to support it. In terms of economic criteria, East Asia is no less ready
 N. Aminian / Structural Change and Economic Dynamics 16 (2005) 91–110 109

for a regional monetary cooperation than Europe was before the EMU. However, prior to
economic considerations, an important issue for monetary cooperation in East Asia is the
political willingness. In the 1990s, there were several regional initiatives towards regional
cooperation, but they may be insufficient. Policy leaders in East Asia tend to have a short
term perspective on monetary cooperation. So far, they do not take into account the regional
economic development, but focus entirely on the prevention and management of future
currency crises. Moreover, there is no connection between political proposals and academic
debate. That is why doubts remain about actual incentives for regional cooperation, and it
is not unlikely that enthusiasm for regional arrangements will fade away with the memory
of the last crisis.
In this context, short and long term options have to be distinguished. Short term coor-
dination has already started, but strengthened regional financial surveillance and increased
economic cooperation is also envisaged. As the region will become more integrated and
more prepared, in terms of economic criteria and particularly political willingness for more
commitment to monetary integration, greater attention should be paid to build institutions
capable of supporting such a process. If this can be successfully done with a long-run vision
of monetary unification, the policymakers in the region might even be able to exploit a
virtuous circle, in which the perspective of monetary union helps to stabilize the exchange
rates in the region. In this case, another crucial issue is that of leadership in the integration
process. In Europe, France and Germany played that role as a tandem. The correspond-
ing parallel could be the Sino-Japanese axis, even though the differences between the two
economies are currently bigger than in the case of post-war France and Germany. Anyhow,
political reconciliation between China and Japan is essential before one of them or both
could function as a driving force of integration in Asia.

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