Asia needs a common reserve currency

by Gamini WARUSHAMANA

Asia has become the power house of the global economy and as a result the centre of gravity of the global power is now shifting from West to Asia.

Professor Akmal Hussain

Today Asia is considering a common reserve currency against US$, said Professor Akmal Hussain of the Beaconhouse National University, Pakistan in an exclusive interview with the Sunday Observer .

Professor Hussain is a senior fellow of Pakistan Institute of Development Economics University and Member Syndicate of the Government College University. He was in Colombo last week to participate at SAARC Business Council. Following are the excerpts from his interview.

There are signs of the end of the global economic crisis and we can see evidence from the last three months. Consumer demand is picking up in the US and Europe. This year there is an absolute contraction in those two economies and if you project, next year there will be a growth in the US and EU economies.

Contraction of these major economies have negative impacts on the South Asia region. It drastically contracted South Asia’s exports. As a result foreign reserves declined in many countries creating financial instability. In 2010 the US economy will grow 2-2.6% and that will have a very positive impact on South Asia.

However, the impacts of the recovery of these economies on South Asia will be dependent on what is going to happen on the budget deficit of the US over next few years.

Present budget deficit of the US is unsustainable. If the economic growth is not accompanied by a revenue increase and the budget deficit remain high, this economic growth will be accompanied by high inflation. Such a high inflation will create a very severe impact not only on the US economy but rest of the world.

High inflation will compel the US to maintain contractionery policies again will not help a sustainable growth. It will depend on the US policies.

However, with the recovery South Asia’s exports will grow again and it will increase foreign reserves of the countries. Already Asian countries have huge foreign reserves, especially in China and India.

Under these circumstance today the most frequently asked question is why we should keep our reserves in terms of US$ insted of our own currency?

The argument is keeping our reserves in US$ means we are lending to the US government and the US consumers. Today 35% of global savings is coming into the US due to the US$ being used as a reserve currency.

Why don’t we lend those money to our own countries and the people by introducing an Asian reserve currency. Then the growth of the Asian countries will depend on the demand from Asian citizens.

However, an Asian reserve currency will have a serious impact on the US economy, in deed of global power.

Even today the US economy is in a serious crisis as it is hugely dependent on foreign debt. For instance the cost of debt servicing of the US is 14 times higher than the government tax revenue. Emergence of a new Asian Reserve currency will make a momentum on the change taking place in the centre of gravity of the world power, from the West to Asia. This is happening after 300 years.

However, Professor Hussain said that Asia should not be in a hurry to go for a Asian reserve currency at the moment. In such a move the US economy will further destabilise and that will destabilise the global economy, because the US is the world’s largest economy.

Therefore, Asian reserve currency is not a short-term option and it should be a long-term option and Asian countries and the US should discuss this shifting of the world power system. These negotiations will lead orderly transition from unipolar world to a multi polar world.

Sustainable economic growth in Asia

The fundamental reason for this power shift is sustainable economic growth in China and India. Over the last 20 years these two countries have achieved a high economic growth rate; China 8-10% and India 6-7%.

On the other hand in the West the percapita income of the people have continuously increased by around 2% over the last 300 years.

In developing countries this is different and in some years it was higher but fluctuated and finally in the long run it is zero. But in China and India this is not so as there is 20 years of steady growth. Therefore, structural changes have taken place.

Why not Russia and Brazil

Both China and India have established infrastructure including knowledge system which makes their growth much more significant for the world economy than short-term growth in Russia and Brazil.

On the other hand the size of the economy is also important and Russia and Brazil are relatively smaller economies. China and India are in the same region and this region is emerging as a great power house of the world economy.

In the next 25 years China will become the world’s largest economy and India the third largest economy after the US. Therefore, a historic opportunity is emerging for the Asians to lead the world. For this the region needs greater integration.

Professor Hussain said this is also a matter of survival, because in the next two decades the Asian region will have to face a serious environmental crisis.

As a result of the global warming ice caps and glaciers of the Himalayan will melt down. First it will create floods and then a drought in the region.

According to the UN forecasts as a result of this phenomena yield of the agricultural production will decline by 30% over the next 30 years. This will affect the growth as well as create a severe food shortage in the region leading to conflicts within and between countries, he said.