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South Asian currency: Peace driver or
pipe dream?
By Shehla Raza Hasan
KOLKATA - When Indian Prime Minister Atal Bihari
Vajpayee gave new life to the idea of a South Asian
currency last month ahead of the The South Asian
Association for Regional Cooperation (SAARC) summit in
Islamabad, it was hailed by academics and economists as
a visionary idea. The hug and handshake between the
leaders of the South Asian neighbors at the close of the
summit was undoubtedly heart-warming for South Asians.
While a common South Asian currency on the lines
of the euro would be more than welcome to a region beset
by half a century of internal problems, skeptics fear
this might be an offshoot of the "feel good factor" in
the Indian economy triggered not only by a good monsoon
but an even better supply of foreign exchange reserves,
which crossed the US$100 billion mark last month.
A recent Goldman Sachs report that India would
be the world's leading economy after 50 years has
created a new euphoria. The visible growth of the
infrastructure sector, especially roads; buoyancy of the
stock markets; the continuing IT boom and the incredible
penetration of telecommunications - rounded off by GDP
growth of over 7 percent - all add up to make a
comfortable and confident picture.
While 2004
promises to be a year of the "feel better factor", the
Indian prime minister's peace initiative and efforts to
build bridges with Pakistan could easily be
misunderstood as election year rhetoric. Nevertheless,
what the premier is suggesting is novel. Instead of
following the well-worn track of dispelling political
tensions first and then following up with economic
cooperation, he is using economic cooperation to bridge
political differences, points out the Confederation of
Indian Industry Director General, Tarun Das.
There is no doubt that what Vajpayee is
proposing is achievable and acceptable for the common
South Asian good. A common currency would foster closer
economic ties and nations could tackle problems such as
drug trafficking, money laundering and smuggling.
According to the Research and Information System for the
Non-Aligned and Developing Nations think tank, a common
currency could help to double trade among South Asian
nations to $10 billion.
The benefits of a common
currency are numerous, consisting primarily of the
following points:
Reducing transaction costs across the frontiers.
Conversion of one currency to another involves costs
that increase production and distribution costs.
Facilitating the movement of scientific, technical
and technical manpower among member-nations, as
conversion losses will be neutralized.
As conversion costs are eliminated, a common
currency could play a major role in formal trade. If
free trade is permitted in the region, much of the
informal trade might be translated into formal trade,
which, in turn, would earn valuable revenue for the
governments.
Pre-empting a South Asian Central Bank, which will
facilitate further economic integration.
A
common currency for any region needs to have strong
fundamentals. Prolonged periods of economic cooperation,
cooperation in matters relating to trade, investment and
the flow of people are some of the necessary trends that
normally precede the creation of a common currency.
Other issues that need to be addressed include lowering
tariffs - or better still - tariff-free imports between
SAARC countries and freer investment norms and visa
regimes.
According to Karachi-based economist, S
Akbar Zaidi, India and Pakistan are in the "pre-historic
age" of economic and trade cooperation. Both have been
trading for all but nine of the last 56 years. This
trade has been miniscule, as both countries export only
five percent of their total exports to the region. In
order to establish a common currency, important lessons
need to be taken from the European Union. Patience,
mutual trust and confidence among the 1.4 billion people
in the seven South Asian nations will be essential.
The peace initiative between India and Pakistan has
only just begun. Europe emerged as a common currency
zone 50 years after the end of World War II. India and
Pakistan have not been talking to each other since
December 2000. The move towards a common currency may be
lauded and the reaction euphoric, but collective
decision-making is a slow affair in the SAARC network.
Even matters of vital importance lie in balance for
decades without any decision being made. The creation of
the South Asian Free Trade Area is a good case in point.
The creation of this earlier would have enabled all
countries of the region to derive vital producer and
consumer surpluses. But decisions on these issues have
been notoriously slow.
No other South Asian
nation has reacted to the notion of a common currency so
far, and India's efforts have mostly been viewed as
hegemonic. In addition, weak economic fundamentals
plague the region. For the creation of the monetary
union, controlling inflation within a fixed range is a
pre-requisite. In the South Asian region, different
countries are at different levels of economic
development. For instance, India's economy is 78 percent
the size of the region. In the 1990s, India grew at a
rate of more than 6 percent, compared to Pakistan's rate
of close to 3.5 percent.
While it is evident is
that massive work is required to achieve this coveted
objective. A common South Asian currency would be used
skillfully in the future as the main driver of peace and
deter any nuclear sabre-rattling by India, Pakistan or
China. In the long run, if this currency becomes a
reality, China could be brought into the common market
fold as well. Once South Asia and China forge common
economic ties, a huge market would emerge, covering half
the world's population and three-fourths of its markets
in terms of consumers under the age of 40.
Therefore, it is high time that South Asian
nations took note of this possibility and worked toward
this common goal. It may be easy to dismiss the idea as
euphoric or a pipe dream in an election year, but it
will be a wise move to work toward. A boost to overall
economic growth and regional development would
automatically dispel mistrust and a lack of confidence
in the long run. This is the opportunity, and South Asia
as a whole must seize it.
(Copyright 2004 Asia
Times Online Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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