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Enhancing Economic Integration….
3. Currency Board System
East Asian countries may agree to jointly fix their currencies to a common external anchor through a currency board system.
Under this system, domestic
currency issues are fully backed up by a foreign currency and the currency board stands ready to buy and sell foreign exchange at the fixed rate. Since there is no scope for domestic monetary policy, the central banks in member countries are no longer needed. Understandably, there is also no lender of last resort under this system.
However, unlike dollarization, countries that adopt the currency board
system still retain their national currencies.
They, therefore, can enjoy the
seigniorage. However, it can easily be offset by the cost of holding foreign currency.
In East Asia, only Hong Kong has a currency board system since 1983. It has caught a lot of attention lately because of its successful defense of its currency during the height of the East Asian financial crisis. In Latin America, only Argentina has a currency board system since 1991, and despite its recent problem, the system seems to be holding.19 Both systems use dollar as the external currency anchor. Hanke and Schuler (1993) have proposed a currency board system for the Americas with the US dollar as the common external anchor because they think it can facilitate the region’s natural tendency to evolve toward a common currency area. In
another
continent,
Honohan and Lane (2000) have proposed a currency board system for the proposed African Monetary Union (AMU) with the euro as the common external anchor.
In the event East Asian countries decide to adopt a currency board arrangement, it must address three issues. One is the common external anchor it should adopt.
Although the US dollar is likely to be a strong candidate, the
geographical distribution of East Asian countries’ trade seems to militate against it (Bayoumi et al. 1999). As shown in Table 8, East Asian economies’ total trade with Japan, US and EU averaged 17.2 percent, 17.7 percent and 14.1 percent, respectively, during the period 1990-1998. One way of dealing with this problem is to adopt a common-currency board peg to a basket of currencies, which most likely would 19
Recently, Domingo Cavallo, Argentina’s Economic Minister, hinted to tie the peso half to the dollar and half to the euro, but only when the euro itself reaches parity with the dollar (The Economist June 2001). On 6 June 2001, the exchange rate was 1.18 euro/dollar.
Mario B. Lamberte, Ma. Melanie S. Milo and Victor Pontines