Recently, in a symposium of great significance, luminaries and thought leaders converged at the 14th South Asia Economic Summit (SAEC) in Dhaka, Bangladesh. This prestigious two-day event, themed “Reframing South Asian Regional Cooperation in the New Context,” was hosted by the Centre for Policy Dialogue (CPD) in collaboration with eminent think tanks from the subcontinent. The summit’s deliberations illuminated the challenges and opportunities that South Asia faces in its quest for economic prosperity and regional cooperation.
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Much like the rest of the globe, South Asia is grappling with the repercussions of a robust dollar that is causing depreciation in regional currencies. In the post-Covid era, inflation, coupled with the effects of the Russia-Ukraine war and the looming specter of climate change, has shed light on how a strong dollar can trigger high inflation, amplifying the region’s economic challenges.
Quest for a unified currency
The central question posed at this summit revolves around the potential of a unified currency to alleviate these challenges. However, as deliberations unfolded, it became evident that the road to a common currency in South Asia is fraught with economic and political obstacles, including a significant trust deficit among the nations in the region.
During the summit’s inaugural session, Prof Rehman Sobhan, Chairman of the Centre for Policy Dialogue (CPD), stressed the immense opportunity for economic prosperity through the facilitation of free cross-border trade among South Asian countries. He lamented the absence of mutual trust that presently hampers the free flow of trade within the region, preventing this promising avenue from being fully realized.
Zahid Hussain, a former lead economist at the World Bank’s Dhaka office, delved into the intricacies of macroeconomic cooperation and the possibility of a common currency during a plenary session. He acknowledged that South Asia may not presently be conducive for a currency union but highlighted that increasing economic integration could foster an incentive for monetary cooperation. Hussain also underlined the need to enhance the effectiveness of existing regional financial cooperation frameworks, rather than embarking on the creation of new forums.
Distinguished voices talked to forge a path forward
During the opening session, Jatiya Sangsad Speaker Shirin Sharmin Chaudhury, serving as the chief guest, appealed to private sector entities and corporations to increase their investments to align with the Sustainable Development Goals (SDGs) set for 2030. Chaudhury stressed the staggering $4 trillion investment gap existing on a global scale to achieve the SDGs, emphasizing the need for a collective effort to mobilize the necessary resources within the confines of national budgets.
Planning Minister MA Mannan, in his address to the attendees, highlighted the remarkable growth in Bangladesh’s exports to India compared to other destinations. He also underlined the untapped potential for regional trade in South Asia, where only 8% of international trade currently takes place within the region. Mannan urged the reduction of trade and non-trade barriers, such as visa requirements and countervailing duty impositions.
Fahmida Khatun, the Executive Director of CPD, provided a brief overview of the summit during her welcoming speech. She emphasized the region’s ongoing struggle to recover from the Covid-19 pandemic and how global challenges, including the Ukraine conflict, are affecting the economies of South Asia. Khatun stressed the importance of addressing issues like collective bargaining in global climate negotiations and the need to promote alliances for technology transfer in the context of the fourth industrial revolution.
In another plenary session titled “State of Regional Cooperation in South Asia: Revisiting Group of Eminent Persons (GEP) Report, New Context, Challenges, and Opportunities,” Ambassador Farooq Sobhan, a distinguished fellow and board member of the Bangladesh Enterprise Institute (BEI), emphasized the need to implement the vision for regional cooperation.
The distinguished participants at the summit shared their valuable insights and perspectives on the critical economic challenges facing South Asia.
Can South Asia follow in Europe’s footsteps?
Until the beginning of 2000s, many experts doubted that a group of countries would willingly relinquish their sovereign currencies and independent monetary policy instruments. However, the introduction of the Euro in Europe on January 1, 2002, shattered those doubts, laying the groundwork for a potentially historic transformation in South Asia.
The European experiment has ignited fervent discussions about whether such a monetary union could serve as a global model for regions like North America, the Association of South East Asian Nations (ASEAN), and West Africa. Yet, one region that has often been overlooked in this discourse is South Asia.
The Asian Crisis of 1997 had minimal impact on South Asia, primarily due to its low capital mobility, which shielded these economies from capital outflows. Nevertheless, this insulation from the crisis came at a steep price. Inward-looking policies stifled the region’s immense growth potential, leading to a stagnation of progress. Research by Rose (1999) indicates that countries sharing a common currency experience a significant increase in trade, a threefold rise when controlling for other factors.
The vision of progressing toward deeper economic integration and ultimately adopting a common currency in South Asia was underscored by the Prime Minister of India, Mr. Vajpayee, in January 2004. This commitment to economic integration was also evident during the Twelfth SAARC Summit held in Islamabad on January 4-6, 2004.
The case for a common currency in SAARC
Since the pioneering works of Mundell (1961) and McKinnon (1963) on the theory of Optimum Currency Areas (OCA), researchers have diligently probed the dynamics of adopting a common currency. In particular, they have focused on four key inter-relationships that shape the benefits of embracing a shared currency:
Extent of Trade: When potential union members engage in significant trade with each other, the transition to a common currency can substantially reduce transaction costs.
Nature of Disturbances: If participating countries frequently face similar economic shocks, the cost of relinquishing monetary policy independence becomes less burdensome.
Degree of Labor Mobility: A high level of labor mobility across borders serves as an effective mechanism for mitigating the impact of asymmetric shocks, especially those resulting in high unemployment within a subset of union members.
Fiscal Transfers: In cases where region-specific shocks are prevalent, a federal fiscal system can offer regional insurance through federally funded unemployment benefits, thus cushioning the impact of these shocks on interregional income disparities.
In recent times, global economic alliances have been shaping the course of international trade, offering a glimpse of economic prosperity and political stability. The Euro area and the European Union have set a shining example of the power of regional collaboration. Talks of Latin American nations joining NAFTA to tap into North American markets and the strengthening of trading regimes through APEC in East Asia have further highlighted the advantages of regional cooperation. Building on this global momentum, South Asia is now witnessing a renewed impetus for regional cooperation within the SAARC framework.
Political and economic gains of South Asian integration
What sets this renewed drive apart is the profound potential for both formal trade expansion and the enhancement of macroeconomic stability. At the heart of this vision lies the possibility of a currency union, a force that could revolutionize the economic landscape of South Asia. The benefits of such a union extend far beyond trade, as it promises to foster macroeconomic stability, igniting a chain reaction of positive outcomes. Stability is the cornerstone upon which savings, investments, and foreign direct investment can thrive, ultimately raising the living standards of over a billion people in this region.
However, the implications are not limited to economics alone. South Asia, much like Europe, stands to gain a powerful political advantage through economic integration. The longstanding discord between nuclear-armed neighbors, India and Pakistan, has marred the region’s peace and stability for decades. The resources expended in the struggle against terrorism have yielded little fruit, exacerbating the region’s challenges
With significant cooperation already in place in various domains like trade, social issues, investment promotion, WTO matters, tourism, and more, the roadmap for greater economic integration is being meticulously charted.
