Can South East Asian Achieve Monetary Integration?

Transcription

1 M.Sc. Thesis in Finance and International Business Authors: Zheng Qin, Xi Feng Yue Academic Advisor: Erik Strøjer Madsen Can South East Asian Achieve Monetary Integration? An analysis of the feasibility for Asia ASEAN + 5 to have a common currency in the near future The Aarhus School of Business December 2006

2 Genesis Peter B. Kenen (1978): In the beginning, God created sterling and the franc. On the second day He created the currency board and, lo, money was well managed. On the third day God decided that man should have free will and so He created the budget deficit. On the fourth day, however, God looked upon His work and was dissatisfied. It was not enough. So, on the fifth day God created the central bank to validate the sins of man. On the sixth day God completed His work by creating man and giving him dominion over all God's creatures. Then, while God rested on the seventh day, man created inflation and the balance-of-payments problem.

3 Abstract In this study, we choose ASEAN 10 member countries plus China, Japan, South Korea, Hong Kong, Taiwan (ASEAN + 5). Our target is to analyze the feasibility of these 15 countries and areas for realizing monetary integration. Firstly, we qualitatively discuss the possibility of monetary integration from political point of view, which is to see if there is Commonality of Destiny in the region of South East Asia 1 ; if they have the necessary basis to economically join together. Afterwards, based on OCA theory, we use several criteria to quantitatively analyze the feasibility of single common currency in South East Asia. Based on our study result, the two most internationalized areas Hong Kong and Singapore are ranked as No. 1 and No.2 most feasible countries to adopt regional common currency, but Hong Kong, Taiwan, South Korea, Philippines, Thailand, Malaysia and Indonesia are most suitable to monetary integration currently. 1 In this paper, we use South East Asia to express the region that ASEAN + 5, totally 15 countries belong to.

4 Table of Contents 1. Introduction Research Questions Qualitative Research Review Analyses Quantitative Research OCA Theoretical Review Empirical Evidence Methodology and Data Labor Mobility Wage and Price Flexibility Asymmetric Shocks Openness of Economy Industrial and Exports Structure Insurance Mechanism Macroeconomic Conditions Ranking Methods Finding Conclusion Shortcomings Suggestion for Further Research Reference Appendix List...i

5 1. Introduction "Today regional integration is getting stronger in Europe and North America to address any problems taking place in the regions, Asia should not become an exceptional case 2." (King, 1998) Economic collaboration is a world wide trend; no countries can isolate themselves in such quickly developing time. Having more and more intense trade relations, countries are facing increasing monetary risk, they start to realize monetary integration is the only way to maximize their economic efficiency and further benefit each other. The theory of Optimal Currency Area (OCA) is the very theory that gives us a basis to test the possibilities for sample countries to found a single regional monetary union, which is one of the final stages of regional economic integration. However, there are two main issues need to be made clear before the realization of the monetary integration; one is political compliance, another is economic feasibility. In this paper we study the feasibility of monetary integration among fifteen countries which include ten member countries of the Association of Southeast Asian Nations 3 (ASEAN), plus China, Japan, South Korea, Taiwan and Hong Kong; we call them ASEAN+5 altogether. In the first part of this paper, we will qualitatively discuss the feasibility of monetary integration for ASEAN + 5 from political point of view, which is to see if there is Commonality of Destiny among them. We believe this is the necessary basis for them to economically join together, but would any single country rather keep its national sovereignty over fiscal and monetary policies? To show this, we are going to do a comparative analysis of these fifteen countries and European Union member countries from cultural background, historical relations among them, and economic 2 South Korean Prime Minister, Kim Jong-pil stated this when he traveled to Japan in November 1998 in the course of a lecture he gave at Kyushu University 3 Association of Southeast Asian Nations include 10 countries, which are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. 1

6 situations together with efforts that have been done. Afterwards, based on OCA theory, which is used often to argue whether or not a certain region is ready to found a monetary union, we will use several criteria to quantitatively analyze the feasibility of common currency in South East Asia. As an example of the final stages of economic integration, the USA can be seen as a right example of monetary integration among every state. Since the European Union adopted their common currency Euro in 1999, it seems more interesting to look at it as a model for a common currency across country borders. OCA theory was first brought forward by Mundell in a pioneering article in After that, OCA Theory has gone through a long evolutionary process. Economists expressed their praises at the same time as critiques in both theoretical and empirical sides. Mckinnon (1963) and Kenen (1969) contributed to the OCA Theory most by adding several important criteria. We are going to use integrated seven criteria to test which countries out of ASEAN +5 are in a good condition for monetary integration, and which are not ready yet. The methodology is in the third part of section four. There are indeed some reasons that we choose ASEAN + 5 as our sample countries. Most of the ASEAN member countries economies did not develop so well but they are already on the way to economic integration, which is the final goal for them as well. In recent years, ASEAN have made some efforts to effect monetary integration with China, Japan, and Korea which is called ASEAN + 3. Taiwan and Hong Kong are two of emerging Asia Four Dragon which cannot be neglected from our study. These fifteen countries and areas have more connections with each other than with other parts of the world. Apart from geographical consideration, there are also religious connections, culture similarity, etc. They are mutually very important trade partners when comparing trade relations with other parts of Asia. 2

7 This paper is organized as follows. In section three we will qualitatively analyze if there are necessary bases for the sample countries to achieve monetary integration. In the first part of section four we will review OCA theory, from the theory's original idea to the contributions by different economists. In the second part of section four, some empirical research will be reviewed. Different scholars have differently weighted concern about different criteria. In the third part of section four we will show our methodology in this paper, to elicit which parameter, data etc that we are going to use. The forth part of section four displays our findings, we will show our result, score and ranking for each criterion. After that we will conclude our finding in section five. In section six and seven, we will point out the shortcomings and limitation in our study, and also give some of our suggestions. 3

8 2. Research Questions The main research question in this paper is: Is it the time to realize monetary integration for ASEAN + 5? Do they have the necessary basis? Based on the criteria of the Optimal Currency Area theory, among ASEAN + 5, which countries have satisfied economic condition to adopt regional common currency, and which countries still need to wait? We are going to assess weighted total standard value for each country based on different OCA criteria, then compare and rank them; in the end we will reveal the different current economic situation for each country. 4

9 3. Qualitative Research By 1997, Asia had attracted almost half of worldwide capital inflow to developing countries. South East Asia is especially more attractive to foreign investors who are looking for a high rate of return. As a result a mass of hot money flows into this region which leads to a dramatic increase in asset prices. The economies of Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea experienced high, GDP growth rates (8-12%) in the late 1980s and early 1990s. India and China s GDP growths have been twice the global rate in the past 20 years. All of these were widely known as Asian economic miracle. However the South East Asian financial crisis started in July 1997 in Thailand, and affected currencies, stock markets, and other asset prices in several Asian countries. Triggered by Latin America s crisis, particularly after the Mexican peso crisis of 1994, with domino effect, western investors lost confidence in securities in the whole South East Asia region and began to massively withdraw their money. Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong Kong, Malaysia, Laos and the Philippines are also hit considerably 4. The South East Asian financial crisis brought a huge financial loss for most of the countries in this region, their currencies dropped down significantly relative to US Dollar, and this also lead to the whole macroeconomic crisis. Every country started to be aware or more aware of the importance of regional monetary collaboration to deal with unusual economic affairs. 3.1 Review Actually, before the South East Asia financial crisis, not everyone lost consciousness by the booming development in that region. Paul Krugman (1994) argued that East Asia's economic growth had historically been the result of capital investment, leading 4 Source: 5

10 to growth in productivity, but total factor productivity had increased only marginally or not at all. Krugman argued that only growth in total factor productivity, and not capital investment, could lead to long-term prosperity; People would worry that a enormous change in the capital investment of an Asian country could lead to considerable financial turbulence in this area, therefore founding financial cooperation would be highly important for those countries to keep themselves away from possible losses in the future. However, there was no any substantive progress for South East Asia on the way to economically integrate each other until November 1995 when the Hong Kong Monetary Authority and the central banks of Malaysia, Indonesia and Thailand reached repurchase agreements designed to provide one another with exchange market support. Later Singapore and the Philippines also joined these agreements. In February of 1996 Hong Kong and Singapore agreed to help Bank of Japan to manage the exchange rate of Yen with US Dollar. In March of the same year, the Bank of Japan joined the network of repurchase arrangements. Later, the CEPII/AMUE/KDI 5 conference showed a sign of increased interest in collective or cooperative exchange rate arrangements for East Asian countries, but because of the later financial crisis, nothing practical proceeded there. In 1997, the painful and costly financial crisis spread over South East Asia because the provision of international financial help through existing multilateral arrangements had not been sufficient and timely and the financial markets and institutions in Asia were insufficiently prepared to manage globalized capital flows. Krugman is considered having been prescient for the Asia financial crisis. Since many economists have been dissatisfied with the way that the International Monetary Fund (IMF) and the international community handled the 1997 financial crisis, academically and practically, that crisis led to a lot more attention on promoting 5 That is Centre d'etudes Prospectives et d'informations Internationales; The Association for the Monetary Union of Europe and Korea Development Institute separately. 6

11 regional monetary and financial cooperation within South East Asia. South East Asia financial crisis in 1997 is a wake-up call to the governments in this region to consider intensifying their economic collaboration and establishing a regional self-protection financial mechanism. In July 1997, when the crisis was just boiling over, Japan proposed the creation of a $100 billion standby reserve monetary fund. The Asian monetary fund will be a framework for promoting financial cooperation and policy coordination in the region, provide a means of defense, in addition to the IMF lending facilities, against future financial crises in East Asia 6. Although the proposal was dismissed by USA, EU and the IMF, but no one denied that cross-country cooperation on financial reform issues would be beneficial to all to provide a mechanism for crisis-prevention and crisis-management. In the post-crisis period, it is increasingly being assessed that intra-regional exchange rate stability is a desirable objective which leads to a common basket pegging of regional currencies and the adoption of a single regional currency in the long run. The experiences of the EU can be helpful on this point, but it is still a question if the EU model will apply to South East Asia which has a different development level on no matter economic or political collaboration from the EU. The setting up of an Asian Monetary fund was initially opposed by IMF, EU and USA for a number of reasons. They think that regional approaches can aggravate the moral hazard problem. In any case, the South East Asian countries do not have political conditions which were necessarily developed for a durable regional arrangement. Moreover, South East Asia countries should focus more on financial and corporate reforms to avoid a future crisis rather than a single currency. However the situation in South East Asian has been changing very fast. To promote regional monetary and financial cooperation, efforts are currently focusing on information exchange and 6 From the Executive Summary of Chiang Mai Initiative as the Foundation of Financial Stability in East Asia,

12 surveillance processes; and resource provision mechanisms are also continued in this region. There are several different contributions in the area of information exchange and surveillance processes. When the proposal of founding an AMF was rejected, the Manila Framework Group 7 (MFG) was founded in November 1997 as an alternative whose role was to strengthen the role of IMF for regional economic surveillance and crisis management. In each semiannual meeting, ADB, IMF and World Bank provide surveillance reports to strengthen the capacity for policy making within the group. MFG is an important initiative by a group of developing countries to consider individual and collective responses to negative impacts on regional economy from any economic events. An organization similar to MFG, ASEAN and China, Japan, South Korea (ASEAN+3) Surveillance Process Meeting was founded in November 1999 policy coordination. On 26th April 2000, a joint ADB/ASEAN Secretariat Workshop on Monitoring Private Capital Flows in ASEAN+3 was held to address short-term liquidity difficulties in the region and in financial markets. In the ASEAN+3 Finance Ministers' Meeting of May 2001, ADB promoted the establishment of the ASEAN+3 early warning systems to help detect emerging macroeconomic financial and corporate sector vulnerabilities, to prevent financial crises in the future. In May 2000, a meeting for the finance ministers of ASEAN+3 countries was held in Chiang Mai. As a sidelines of the ADB Annual Meeting, they finally reached agreement on the Chiang Mai Initiative (CMI) which mainly called for (1) An expanded ASEAN Swap Arrangement among ASEAN + 3 (2) Use of the ASEAN+3 framework to promote the exchange of consistent and timely data and information on capital flows. (3) Establishment of a regional financing arrangement to supplement 7 The 14 member economies of Manila Framework Group are Australia, Brunei Darussalam, Canada, China, Hong Kong SAR, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand and the United States of America. 8

13 existing international facilities; (4) Establishment of an early warning system that could enhance the ability to provide sufficient and timely financial stability in the region of South East Asia. In addition to reiterating the need for strengthened policy dialogues and regional cooperation activities, CMI is the first significant regional financing arrangement to enable countries to cope with disruptive capital flows and maintain exchange rate stability in Asia. ASEAN+3 have achieved some tangible results in these years after creating CMI. e.g. the size of swaps already reached 75 billion US Dollar (May, 2006); establishment of Economic Review and Policy Dialogue (ERPD); Asian Bond Markets Initiative (ABMI); ASEAN+3 Research Group etc. all of these are to strengthen the financial collaboration and promote talk of common policy making of this region 8. Many efforts made in the area of South East Asia are to achieve the monetary integration which can finally reach the regional financial stability by cooperative arrangements in exchange rates and monetary policy. Empirical analyses on the extent of monetary integration have attempted to answer the question of whether a group of countries has satisfied the Optimum Currency Area (OCA) criteria, and based on this to judge whether establishing a common monetary arrangement will have potentially high social benefits or not. That is, if a country is suitable to adopt regional common currency, the loss by giving up macroeconomic instruments for stabilization should be more than compensated for by microeconomic benefits to be gained. Some studies from different points of view have already been done to empirically verify whether sample countries have satisfied the OCA criteria. Barry Eichengreen and Tamin Bayoumi (1996) analyzed the economic and political prospects for monetary integration in East Asia at that time. They think the region satisfies the standard OCA criteria to adopt a common monetary policy about as sufficiently as 8 Source: 9

14 Western Europe. Junichi Goto (2002) analyzed the degree of interdependence in terms of a set of economic variables like trade, labor and macroeconomic shocks in East Asia, and he found that strong interdependent relation among these countries and monetary cooperation and integration among Asian countries is now necessary. Eiji Ogawa and Kentaro Kawasaki (2001) in their "Toward and Asian Currency Union" consider founding a common currency area in East Asia as an important but questionable topic in policy dialogue among east Asian countries in the future since the de facto dollar peg was dangerous for them. The authors use the generalized purchasing power parity (G-ppp) model to analyze the issue. their research result are that it is difficult for all of East Asian countries to create a single common currency region given the current situation of East Asia, but there are two groups of a common currency region in the ASEAN. Bin Zhang (2004) thinks that currency cooperation of East Asia on a higher level in the future could be realizable but are far beyond our vision at the moment. Norbert Walter (2004) proposed a positive idea which is "create a common Asian currency by 2025". He thinks Asia is a logical candidate to take a leadership role in the reform of global currency markets-by creating a common Asian currency although in the region each country has strong separate identity and has developed on separate, parallel track; he believes that the result would help Asia to continue its impressive development and remove an unnecessary additional cost of cross-border trade and investment. Economic integration sounds much greater than a mere dream 9 (Kwon, 2005). Kwon thinks if Asian countries take the appropriate steps, they may be able to form a currency union like the European Monetary Union. However, he pointed out that there are several prerequisites before such actions can materialize. Firstly, increasing free trade agreements (FTAs) and cooperation in the region will strengthen the interdependence of member countries trade and investment and further integrated 9 Kwon Tae-shin is the vice Finance-Economy Minister of South Korea, he said this during an international seminar on Asian currency integration held in Seou,

15 markets. Secondly, exchange rates must accurately reflect the economic situations of each country. Thirdly, regional cooperation must be advanced to the extent that members could implement common policy responses through macroeconomic policy coordination. In particular, he stressed that Korea, China and Japan must collaborate to effectively lead the cooperation in the ASEAN+3. Viner's (1961) three stages of economic cooperation in ascending order are trade cooperation; monetary cooperation and full economic union respectively. A good reveal of this is that the intra-regional trade in East Asia was already more than 50 percent of the region's total trade in Charles Wyplosz (2002) believe the European approach should not be the only viable one, Europe has followed a unique path of institution-building, and seemly Asia is to travel a different route, but no one doubt Asia can not be a exception when the whole world are intending to economic integration. 3.2 Analysis In the region of South East Asia, 10 ASEAN member countries minimize their issues to integrate together, but the historic political issues between Japan and China, Japan and Korea, China and Taiwan still exist and sometimes are triggered to the verge of break out. However is this really what it looks like? Does South East Asia have the basis to found monetary union? We will try to find the answers by a comparison with European Union. Making a tour over the history of Europe, it is not hard to find how decisive the role of the economy benefit is. Historically, there is no lack of consecutive conflict and war among European countries, e.g. Europe is the main field of neoteric World War. At that time, nobody could predict that years and years later those countries would be able to join together economically, even politically; what is the secret inside? From the original free trade region and common market to monetary union, we can see a path of gradually increasing cooperation among European countries. The power to 11

16 make this happen is no more than economical interest, which meanwhile indicates the possibility to create a simulated miracle in the area of Asia. Brief Story of EU and Euro 10 For centuries, there have been consecutive bloody wars having happening in Euro-land, and the factors of instability always come from the formation of several nationalist movements which resulted in a large number of independence wars in the period between 1815 and After the relatively short peaceful period in the late 19 th century, the rivalry between European powers finally exploded, and World War I started in However, following World War I there was not a lengthy peace; instead the conflict between communism, capitalism and fascism became more and more unbearable, which finally led to World War II. After a huge economic loss because of the wars, European countries finally returned to peacetime in the middle of 20 th century, and re-carried on their economic development. At the same time, they started trying to unite themselves economically and politically to secure a lasting peace. In 1951, to integrate the coal and steel industries of Western Europe, six countries (Belgium, West Germany, Luxembourg, France, Italy and the Netherlands) set up the European Coal and Steel Community (ECSC). This new independent authority took charge of any big decision about the coal and steel industry in these six countries. The ECSC was very successful, which could be seen as the first step to the European Union many years later. In 1957, the same member states of ECSC signed the Treaties of Rome, creating another two communities, which are the European Atomic Energy Community (EURATOM) and the European Economic Community (EEC). They abolished trade barriers between the members to form a common market and increase economic prosperity. In 1967 the institutions of the three European communities merged, which 10 Source: and 12

17 became the rudimentary European Union. Until 1992, after separate negotiations on both monetary and political union among member states, the Treaty of Maastricht was established, in which the member states made common policies in a very wide range of fields - from agriculture to culture, from consumer affairs to competition, from the environment and energy to transport and trade. The treaty of Maastricht led to the creation of European Union and the first regional common currency EURO. However, at the beginning (from the midnight on 1 January 1999), the Euro was introduced only in non-physical form, e.g., electronic transfers, banking, travelers' cheques etc. before the real euro were introduced on 1 January The notes and coins for the old currencies are still used as legal tender. Officially, it lasted two months for the exchanging trans-period from former currencies notes and coins to the new Euro until 28 February Although the exchange rate between Euro and US dollar considerably fluctuated since it came into being, as the currency of the second biggest economy, nobody doubts that the Euro changed the dominant status of US dollar in the world financial market. A Matter of Culture Background Birds of a feather flock together. This old saying expresses that things of one kind get together; analogously looking at this world, economic community needs cultural community as its basis; having the same cultural background is one of the key factors impacting the integration among different countries at the beginning of the integration. One very visible example is the European Union. The question of common culture or Table Roman Muslims Protestant Others Catholic Belgium 47% 3.50% 49.50% Germany 33% 33% Luxembourg 87% 13% Netherlands 30% 0-1% 20% 49% French 83-88% 5-10% 2% 1% Italy 90% 10% Source: en.wikipedia.org common values in Euro-land is far more complex than it seems, but nobody can deny Christianity have been being the dominant feature in shaping European culture for at least the last 1700 years. Having a look at the religion situations in the six member 13 Religion Situation in Former ECSC

18 states that originally formed ECSC (Table 3.2.1), we can easily see that Roman Catholicism has an absolute dominating status above any other religions in their societies, which can smooth the process of political talk and economic collaboration. Among the eleven multilateral economic agreements nowadays, ten of these were regional agreements, and only one of them is plurilateral agreement (Table 3.2.2). Free trade area is considered the second stage of economic integration. Countries from the same area with similar culture background, even having the same language are always the initiatory members of a free trade area, e.g. as the second biggest free trade area in the world, The North American Free Trade Agreement (NAFTA) originally was expanded from the earlier Canada-U.S. Free Trade Agreement of The culture between U.S.A and Canada has been very interchangeable over time. Canadian culture has been heavily influenced by this neighbor. Because of high labor capital mobility between them, these two countries shared the very diverse North American Culture. Table Existing Multiliberal Agreements in the World Name of the Agreement Members Regional Agreements Agadir Agreement ASEAN Free Trade Area (AFTA) Central American Common Market (CACM) Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) Central European Free Trade Agreement (CEFTA) Common Market for Eastern and Southern Africa (COMESA) European Free Trade Association (EFTA) Morocco, Tunisia, Egypt and Jordan Brunei,Indonesia,Malaysia,Philippines,Singapore,Thailand.Vietnam, Laos,Myanmar and Cambodia Guatemala, El Salvador, Honduras and Nicaragua the U.S., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic Romania, Bulgaria, Croatia and the Republic of Macedonia Burundi, Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Sudan, Zambia and Zimbabwe Iceland, Norway, Switzerland and Liechtenstein G-3 Free Trade Agreement Mexico, Colombia and Venezuela Plurilateral Agreements North American Free Trade Agreement (NAFTA) South Asia Free Trade Agreement (SAFTA) Trans-Pacific Strategic Economic Partnership (P4) Canada, U.S. and Mexico India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and the Maldives Chile, New Zealand, Singapore, Brunei Source: 14

19 Asia has been going through many and different developing phases of culture; however, the comparability of cultural background in specific areas is still indelible after hundreds of years. Historically, in East Asia, the dominant influence has been China; throughout thousands of years, Japan and South-Korea shared Chinese-derived custom, language characteristics and religion like Buddhism. Moreover created by Chinese philosopher Confucius, Confucianism became widely known among the whole South East Asia; even now China, Japan and South-Korea are still sharing social and moral philosophy inherited from Confucianism. In modern times, there are more and more inter-country cultural exchanges which enhance the similarity of cultural backgrounds among these countries. The Association of Southeast Asia Nations (ASEAN) was Founded on 8 August 1967, the original five member countries, Indonesia, Malaysia, the Philippines, Singapore and Thailand have very much in common. For instance, all of them are multi-ethnic and multi-cultural societies; historically all of them were influenced by America or Europe because of long colonial periods; besides their own language, English remains one of the important languages being used; they all were affected significantly by Chinese culture, in some countries like Malaysia and Thailand, the Chinese business has been the most dominant; Islam is the main or one of main religions in all ASEAN member states after Christianity or Buddhism. Moreover, in the past hundred years, these five ASEAN members were influenced by each other as well, e.g. Filipino culture were influenced by Indonesian, Malay culture influenced Singapore and Indonesia. In summary, in the region of South East Asia, countries share similar cultural and religions basis respectively. With these common bases, people from different countries will not find many barriers in communication with each other, i.e. both sides are already familiar with non-verbal ways to express their feelings. Thus it is very much possible that all of them can in harmony form one community of culture which will be the bases to form one economic community in this region. 15

20 A Matter of Economic Interest To reach a single currency among most of EU countries so far is not an easy gain. It was gestated with a number of arguments, born as a controversial action, and there has been no lack of debates since it came into being. Among them, the conflict between keeping national independence and sharing economic profit is always the biggest issue in every country. Joining the Euro-zone means the national government hands over the monetary control to European Central Bank (ECB). Euro-skeptics point out that because interest rate was set by ECB, with less specific monetary policy, Euro-zone nation lost their ability to resolve their own economic problem like inflation/deflation based on their own specific economy situation. They argue that a suitable interest rate in Spain may actually do no good for the economies of Finland. High interest rates in Euro-zone, for instance, could damage the former strong economy of a new member state, whereas low euro rates would overheat a country whose economy is already in the mire. It took more than 15 years of negotiations, planning and preparations before Euro was launched on 1 January 1999; there are still three old EU member states, Denmark, Sweden and the United Kingdom anxiously hovering outside the monetary union; and many affects from the single currency still need time to be tested in the future. However, the Euro has now become a truly existing currency. Under the above suspicions, European countries take the real action along the road of economic integration with extraordinary courage. The Euro has changed the status of the US Dollar, or at least we can say it is shaking the status of the US Dollar in the international financial market, e.g. pricing oil in euro is already been on the agenda of Organization of Petroleum Exporting Countries (OPEC). In 2006, Iran announced its plans to open an International Oil Bourse for the express purpose of trading oil priced in other currencies, including petrol-euros. The result is going to subsidize the 16

21 European Union by increasing the value of the Euro and the Seigniorage. Moreover, there are more advantages from the single currency which most of member countries are unanimous with, i.e. removal of exchange rate risk and conversion fees, deeper financial markets; decrease of price disparity, competitive funding for the companies in Euro zone, macroeconomic stability and extra profit from being a new reserve currency. After studying the effects of the euro in the period , Arturo, Yrjo, Mattias (2002) found that because a single currency lower the currency risks and consequently reduce firms' cost of capital, compared with the five non-emu countries, the valuations for large firms had grown by 7.9% in the Euroland. This is just the opposite from the principle that "the adoption of euro could have increased market risk in Europe, because authorities in individual countries now lack instruments to respond to asymmetric shocks". They also found firms in the euro countries have invested 3.3% more of their assets than non-euro firms in the same period. In addition, by 2010, the six-nation Gulf Cooperation Council (GCC), which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emigrates, is going to take the next step on the economic integration road launch a single currency. Since compared with other economic bodies in the world, the GCC has relatively weak intra trade activities, industries lack diversity (oil sectors dominate those economies), they expect that the establishment of a common currency will boost the intra regional trade and investment among member states and reap more potential profits with the appropriate centralized economic policy made by the future currency union. Work has been underway since this issue was approved at the 22 nd GCC Summit held in 2001, e.g. all the GCC member states already completed linking currencies with U.S. dollar before

22 Wait or Take Real Action Economic interest can always be considered over cultural or political difference. The only way to enhance regional competitive advantage is by cooperating, eventually joining together. As a perfect example, European countries, stimulated by economic interest, overlook the conflict existing among them to step forward for monetary integration. This second biggest economy in the world impels the trend towards multi-polarization which dilutes economic hegemonies by specific super power, thus protect its own interest. Compared with European countries, regionally Asian countries also have their own similar culture background; as a fast developing area, there is a much greater need for South East Asian countries to cooperate with each other to maximize their competitive advantages, and with more and more regions in the world preparing, starting and intensifying their own regional economic community, there is no reason for South East Asia to keep looking on. 18

23 4. Quantitative Research Since the theory of Optimal Currency Area (OCA) was brought forward by Mundell, it has been going through an evolutional process, improved and tested by many economists and scholars. Based on the statistics from ECONOMICSTS, about two of third regional collaborations were realized during 1990s or afterwards, and those regional economic collaborations emerged with different formations; all of these indicate the issue of economic integration is more and more important. Especially, the forthcoming of European Union new common currency inspired both theoretical and empirical discussion and study on this issue. 4.1 OCA Theoretical Review Optimum Currency Area (OCA) Theory has a long evolutional process, since it was brought forward by Mundell in a pioneering article in After that, many academicians eagerly bent themselves to verify the criteria which the theory contains and dig into the true connection between theoretical criteria and the real world. Most of them complemented it using other economic theories. However, economists also put forward many critiques about OCA theory and testify them theoretically and empirically in the same time. Mckinnon (1963) and Kenen (1969) did great contributions to the OCA Theory which enriched the whole sketch of it. The launch of the euro currency was officially completed as of January 1, 2002, which gave us a successful and practical example of OCA Theory. Until now there are two biggest successful region-related economical cooperative organizations in the world: the first one is the North American Free Trade Area (NAFTA); the second one is the European Economic and Monetary Union (EMU) which includes 12 European countries with a total GDP around 15% of the world s GDP in terms of economic size 11. From the 80s of last century until now, many countries have suffered from current account imbalance. Sometimes the flexible floating exchange rate can make things 11 Source: 19

24 even worse. The yearning for regional exchange rates stability was increasing in most trade orientated economy countries when Europe made progress in completing the single currency union. In June 1989, at the Madrid European Council, Commission President Jacques Delors put forward a time schedule for installing economic and monetary union (EMU). This plan was later enshrined in the Treaty signed at Maastricht in February On 1 st January 1999, the 11 participating countries national currencies disappeared and were replaced by the Euro, which thus becomes the shared currency of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. (Greece joined them on 1 st January 2001). On 1 st January 2002, Euro-denominated notes and coins were put into circulation. Thereafter, only the Euro is legal currency in the Euro area countries 12. Mundell, the pioneer of OCA Theory, got his Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1999 in order to award his analysis of monetary and fiscal policy under different exchange rate regimes and his unique analysis of Optimum Currency Areas. He established new methods which turned out to have lasting impact and he posed new questions which were one step ahead of social development. His methodology formed a solid foundation for research and teaching in international macroeconomics. He was also called the Father of Euro. The OCA Theory is really something worth studying and many countries outside Europe have formed, or contemplate forming a currency union, such as the Southeast Asian countries. It has also had a strong impact on macro economic policy considerations in practice. In the following section, we will present the OCA theory in abstracts and also some critiques about it. Brief Description of OCA Theory The Optimal Currency Area Theory was outlined by two seminal papers which were written separately by Mundell in 1961 and McKinnon in 1963 about the conditions 12 Source: 20

25 under which several administrative jurisdictions might suitably be subjected to the same monetary policy. Further refinements of this approach were subsequently made by Kenen (1969). Bayoumi and Eichengreen (1994) also offered a formal model of Optimal Currency Area with microeconomic foundations to underscore Mundell s original thesis. An Optimum Currency Area is defined as the optimal geographic domain of a single currency, or of several currencies whose exchange rates are irrevocably pegged and might be unified. The single currency, or the pegged currencies, can fluctuate only in unison against the rest of the world. The domain of an OCA is given by the sovereign countries which choose to adopt a single currency or to irrevocably peg their exchange rates. Optimality is defined in terms of several OCA criteria, including the mobility of labor and other production factors; price and wage flexibility; economic openness; diversification in production; international trade structure; consumption similarity in terms of inflation rates; fiscal integration and political integration, and so on. Countries would choose to integrate in a currency area in expectation that current and future benefits exceed costs. 13 Because of the periodic balance-of-payments crises and the undergoing processes of economic integration and disintegration in the certain parts of the world, countries which have experimented with flexible exchange rates are likely to face particular problems which the theory of optimum currency areas can elucidate if the national currency area does not coincide with optimum currency area. There are two opposing outcomes for a country to face when it considers joining a currency area: the benefits and costs. The benefits side includes: lower transaction costs; elimination of exchange risks inside the currency area; price transparency that will foster competition; better functioning of the internal market that will foster trade; lower investment risk; increase of FDI and enhanced resource allocation (Mongelli 13 Source: European central bank working paper series, No

26 2002). The cost side derives mainly from the fact that when a country relinquishes its national currency, it also relinquishes an instrument of economic policy i.e. it loses the ability to conduct a national monetary policy. This implies that a nation joining a monetary union will not be able to change the price of its currency any more (by devaluations and revaluations), to determine the quantity of the national money in circulation, or to change the short-term interest rate. Switching to a new currency and increased administration cost stemming from a common central bank are also big costs to consider. If countries in a close geographic area plan to form a common currency area, they should consider the following three aspects: firstly, countries should satisfy as many economic and financial criteria as they can to fit for a theoretical foundation; secondly, the compact friendship relations in economy and finance among members are appreciated; and thirdly, not only economic, but also political integrations are important when countries are planning a regional currency. Original Theory Support Mundell (1961) concentrated on the optimality of founding currency areas. He mainly discussed whether it was worthwhile for one country to abandon the national monetary policy and join in a monetary union, and how countries adjusted their unbalanced economies when they faced asymmetric shocks but could not use their national monetary policy tools, such as depreciation. He pointed out that the periodic balance-of-payments crises would remain an integral feature of the international economic system as long as fixed exchange rates and rigid wage and price levels prevented the terms of trade from fulfilling a natural role in the adjustment process. But a system of national currencies connected by flexible exchange rates was not the right solution for the payments crises. A system of flexible exchange rates was usually presented, as a device whereby depreciation could replace the unemployment when the external balance was in deficit, and appreciation could 22

27 replace inflation when it was in surplus. But should all existing national currencies be flexible? If not, what is the appropriate domain of a currency area? A single currency implies a single central bank and therefore a potentially elastic supply of interregional means of payments. But in a currency area, the supply of international means of payment is conditional upon the cooperation of many central banks. It means there will also be a difference between interregional adjustment and international adjustment, even though exchange rates are fixed. This means asymmetric shocks in one specific country can still occur in case of the imbalance of international payment. Therefore, Mundell (1961) thought that the similarity of shocks or the synchronization of business cycle was the core criterion for an optimum currency area. Wage and price flexibility are also needed to be considered. To illustrate how the above criteria affect currency areas, we can consider a simple model of two countries, A and B, which are in full employment and economic equilibrium initially. Assume that money wages and prices are rigidity in the short run, and the monetary authorities respond to the inflation. What happens if one asymmetric shock hits the equilibrium? Suppose the shock is a shift of demand from the goods of country B to the goods of country A? Figure 3.1 Aggregate Demand and Supply Curves We can draw the aggregate demand and supply curves for the two countries, A and B. In figure 3.1, if there is a shift of demand from B to A, then the negatively sloping aggregate demand (D) curve for country A will go upward, which implies that the domestic output (Y) increases and the price level (P) goes up for country A. 23

28 Correspondingly, the demand curve of country B will go downward and make the domestic output and price level of country B fall. In this situation, the effect of shifting demand from B to A is most likely to increase the employment and a surplus in the balance of payments in country A and bring unemployment and a deficit in balance of payments in country B. Both countries have to face problems of macroeconomic imbalance caused by this asymmetric shock. Country A will suffer from by a pressure of inflation. Country B will worry about unemployment rate increase and domestic output decline. The adjustment methods for each country will change depending on their policy preference or the fact if they are in the same currency area with one single currency and shared monetary policies made by a single central authority. In our example, if A and B are not in the same currency area, then they can use their own monetary policy to rebalance their economy. It means that country B could devalue its currency so that the competitiveness of its products will increase and shift the aggregate demand curve back to the original equilibrium. As a result, country A will experience a relative appreciation of its own currency and the aggregate demand curve would shift back to previous one. Or the pace of employment in country B will be set by the willingness of country A to inflate. If country A experiences inflation, this means an increase of money supply in the circulation market of country A. The purchasing power will then be bigger than the supply of commodity in country A. Consumers in country A will turn their surplus demand back to country B. So that country B will solve their unemployment problem. The economy of the two countries will balance again. If they formed a currency area with the same central authority, then the authority could consider how to rebalance the economy. The pace of inflation is set by the willingness of the central authority to allow unemployment in country B. Or the unemployment problem in country B could be solved by the surplus country to inflate, 24

29 which means that the burden of international adjustment should fall on country A, and country A experiences inflation until unemployment in country B is eliminated. But a currency area cannot prevent both unemployment and inflation successfully among its members. Mundell (1961) suggested that the essential condition for optimum currency areas should be factors mobility inside the area and factors immobility among different currency areas. In conclusion, the basic mechanisms to adjust for asymmetric shocks in a currency area are factor mobility 14 to rebalance the unemployment rate, and wage and price flexibility, to rebalance for the price level (Mundell 1961). Adjustment Back to New Equilibrium For factor mobility, we can just take labor mobility as an example to explain how to utilize it to rebalance the economy in a currency area. Due to the unemployment pressure in country B, overspill workers could migrate to country A where there is excess demand for labor. In fact this mechanism pushes the economy back to previous equilibrium. Figure 3.2 The Automatic Adjustment Process with Wage Flexibility Regarding wage flexibility, we can show it in figure 3.2. Workers in country B will 14 The idea of factor mobility has two distinct senses: (1) geographic factor mobility among regions; (2) factor mobility among industries. Mckinnon (1963), p

30 reduce their wage claims because of decreased demand in B. Correspondingly, the cost of production will decrease and shift the aggregate supply curve downwards in country B. Then country B will arrive at a new equilibrium point (figure 3.2, point E) where with the same output, the price level is lower than before. The opposite will happen in country A. Excess demand for labor will increase wage claims and increase production cost in country A. The price will increase, which pushes the supply curve upwards so that the demand for products of country A decreases. Then country A reaches a new equilibrium (figure 3.2, point E) with a higher price level but the same output as before. The second-order effect on the two countries equilibrium is increased demand in country B s products and opposite in country A. Contributions of Other Authors Like all other original ideas, Mundell s criteria for Optimum Currency Area are not sufficient. Many other authors added their new ideas to the theory afterwards. Ingram (1969) puzzled that in the real world, wage and price could hardly float freely. Even the production factors could not have thorough mobility. He suggested that the real capital could substitute production factors to move flexibly so that it can relocate economic resource. McKinnon (1963) discussed the influence of the openness of economy, i.e. the ratio of tradable to non-tradable goods, on the problem of the reconciling external and internal balance, emphasizing the need for internal price-level stability. He pointed out that in a world where trade patterns were not perfectly stable, there would always be the problem of changing the world pattern of resource use among various industries. And the degree of internal resource immobility among industries was always accepted as an obstacle to be overcome as smoothly as possible. Applying common currency inside optimal-sized currency areas to efficiently overcome factor immobility generally held. Kenen (1969) also stressed the importance of the similarity of the trading structure for 26

31 making a monetary union. He believed that countries with a less diversified output structure were subject to more asymmetric shocks, making them less suitable to join in a monetary union. If one country had the more diversified consumption and production level, it would be easier to absorb the asymmetric shocks. Not only should the economic criteria be taken into account, but the financial integration is also something important. Ingram (1969) stressed that if the financial market was highly integrated then with the free float capital, countries could response to asymmetric shocks quickly, so that they would not need to depend mainly on exchange rate adjustment. The free float capital here referred to long-run capital instead of short-run capital mobility. Mundell (1973) defined international risk sharing, and believed that if the members in one currency area could hold multinational financial assets, they would support each other in asymmetric shocks and avoid extensive risk. Fleming (1971) pointed out that the similarity of inflation rate was also something to consider when forming a currency area. He argued that it was difficult to fix an exchange rate if one country inflated and the other did not. Flexible adjustment of prices and wages to excess demand and excess supply would bring automatic adjustment to asymmetric shocks, so the need for exchange rate adjustment simply would not be there. Also low and stable price level could help to maintain balance in foreign trade and reduce the need for exchange rate instruments to rebalance for asymmetric shock. Kenen (1969) also stressed that an optimum currency area may consider more about supranational fiscal transformation so that the central bank could efficiently support countries suffered by asymmetric shocks and release the predicament. But the fiscal transformation was more about political integration and was more difficult to come to an agreement among members in the currency area. 27

32 Long-term political commitment attracted academics in different ways in recently years. Eichengreen (1997) pointed out that some of the OCA criteria can not apply, in order to rebalance for asymmetric shocks, unless the monetary integration was followed by political integration in the currency legal system. He thought the efficacy of a currency area depended on policy positions taken by governments and on the firmness of their commitment to them. He argued that if there was a fiscal constraint among the participants, there would be a pressure to more political integration. We can see this clearly from the association process of EMU, that as the EMU membership applies budgetary constrains the monetary integration in Europe might be followed up by more political integration. A Critique on OCA Theory Everything has two sides and nothing is perfect, so goes OCA theory. After its first introduction, many critiques rushed out and academics began to discuss if OCA theory could be suitable in the real world. Mundell himself had doubts about the factor mobility in the regional areas. Later, in 1973, he reassessed his original theory and added the insurance mechanism to it, which is in fact the criterion bought forward by Ingram (1969). He also questioned the efficiency of the exchange rate mechanism to adjust for asymmetric shocks. Corden (1972) was also skeptical concerning the importance of factor mobility in the adjustment to asymmetric shocks. He believed that labor immobility was more realistic. And he argued that short-term capital mobility could be helpful, but in the long-term capital mobility could not solve the adjustment problem for two countries affected by asymmetric shocks. Tavals (1994) thought that so many criteria were in the OCA theory, there was a problem of inconclusiveness, as OCA properties might point in different directions; 28

33 and also a problem of inconsistency, as some countries might seem suitable to fix their exchange rate with their main partners according to some of their characteristics but not according to others. Also he noted that small economies confronted contra alternatives deciding on the suitable exchange rate system. Actually so many academics have doubts about the effectiveness of exchange rate in adjusting an asymmetric shock. If it is not so useful, the cost of abandoning the autonomy of the monetary policy is lower. Branson (1986) thought that due to the lag of functioning and slowness of the portfolio-balance channel, the exchange rate mechanism could not gestate adjustments after asymmetric shock, and proved the ineffectiveness of it. Exchange rate changes usually have no permanent effects on output and employment so that it makes costs less to join in a common currency area. Another reason why the costs are less for joining in a currency area is that countries that maintain independent monetary and exchange rate policies often find out that the movements of exchange rate become a source of macroeconomic disturbances instead of being instruments of macroeconomic stabilization (De Grauwe (2003)). This kind of idea is just the opposite view of traditional OCA theory which believed that the costs were much more than the benefits when countries were forming a common currency area. Frankel and Rose (1998) first proposed that the correlation of business cycles was an endogenous property of economies, and thus were subject to change after monetary union. Previous OCA literature had taken the various criteria as being unchanging exogenous variables which were affected by monetary union. They thought that academics examined criteria using European data as a benchmark for comparison generally. But this procedure was untenable, since the OCA criteria are jointly endogenous, and the structure of these economies was likely to change dramatically as a result of EMU. 29

34 Recently academics believe that it is hard to define the optimality of a currency area. It means the OCA theory criteria have not as much use as everybody hoped in evaluating which country is suitable for joining a common currency area (Robson (1987)). Tower and Willett (1976) noted that there was no general agreement on the quantitative importance of any OCA criteria, and strongly suggested empirical research. They believe that there are more endogenous factors which have significant effects than exogenous factors. Actually, different social preferences and national policies play an important role in OCA theory, and they will not disappear after the foundation of a common currency area. Many of these differences have a political, institutional, or cultural origin, such as the characteristics of national labor markets, tax systems and legal systems which decide the national financial markets. The successful example of OCA theory----emu, also faces a continually hard integration process right now. Of course it will erase some of these differences but certainly not all. The remaining ones some day will lead to divergent movements in national output and prices, creating the need for difficult national adjustments. The absence of national exchange rate policies to assist in this adjustment process will then be felt as a cost of the monetary union. In this sense one may say that the EU countries took a calculated risk (De Grauwe(2003)). Despite the criticism of the OCA theory, Mundell s pioneering work is substantial. As the world economy is growing faster and the regional integration and cooperation are experiencing a flourishing period, so many regional related countries plan to establish economic cooperation organizations. In East Asia, the ASEAN (Association of South East Asian Nations) is quickly building up a free trade area (AFTA), and a single currency or a multiple-currency monetary union 15 is one basic objective for them. The experience of EMU and the Theory of OCA are still two important technical supports to follow. 15 Multiple-currency monetary union refers to a currency union in which all the members should peg their national currency to a weighted basket of currencies. 30

35 4.2 Empirical Evidence There are a big amount of OCA criteria which focus on different aspects of economy. But the basic parts for countries to consider are the costs and benefits. Actually, sharing one simple currency means the country should give up the authority of using national monetary policy to adjust economy when it suffers an asymmetric shock. It is obviously that the country should participate in common currency area when benefits exceed costs. On the other hand, recent discussions about OCA execution in the real world are mainly on whether the criteria are endogenous or exogenous. Supporters of exogenesis believe that only if the countries are suitable for almost all of the economic criteria should they attend in a currency area. On the opposite side, much more academics believe that the endogenous factors are more important when deciding to take part in currency area. But from the integration process of the EMU, we believe that the economic measures for suitability of group countries monetary integration are likely to be endogenous, at least in part. In addition, the major European countries fell rapidly between 1987 and 1995, indicating that they became better candidates for EMU (Bayoumi, Eichengreen and Mauro, 2000). This proved that the OCA criteria are themselves related to decisions on economic integration, so that the desirability of a monetary union becomes itself partly a function of the underlying political choices (Frankel and Rose, 1998). This implies that the political commitment to further economic integration may well be an important criterion for a monetary union. Finally, the conduct of a common monetary policy in the Euro area is rendered easier by the fact that its financial systems which can be used as an insurance mechanism work in a similar manner. In Southeast Asian countries, however, the levels of economic development differ more than within Europe. We can take Singapore and 31

36 Vietnam as a comparison. While Singapore is a world leader in a number of high-tech industries, Vietnam exports relatively low-tech manufactures. Singapore has one of the most advanced financial markets in the world and is one of the leading foreign-exchange trading centers, but Vietnam is still in the early stages of developing and opening its financial markets. Such differences in economic and financial development would complicate efforts to encourage economic and financial integration, which is a necessary concomitant of successful monetary integration. From the analysis above, we will separate our criteria into four main discussion parts: the costs from losing monetary sovereignty, the benefits from avoiding large exchange rate fluctuation with trade partners, the level of insurance mechanism and the endogenous factors especially the regulation of macroeconomic conditions made by each government. Each part contains different criteria. And we finally aim to answer whether the selected Southeast Asian areas are suitable for a common currency area. The criteria which we will use here are: (1) labor mobility, which is the recommended adjustment tool at this phase; (2) wage and price flexibility which is the essential substitutes of labor mobility; (3) correlations of asymmetric shocks inside sample areas. This is the basic consideration for one country to think over if it would like to join in a common currency area; (4) openness of economy, especially the openness of intra-regional relations; (5) industrial and exports structure, which measures the diversification of sample areas trade; (6) insurance mechanism, which means the financial statue of participants should offer an insurance mechanism; (7) macroeconomic conditions and its operations, especially the growth speed of sample regions and the interest rate level, all of which can enhance the stability of one economy then improve government policy credibility. And this criterion could also measure the potential obstacles when member regions start the cooperation process. The first three criteria are the costs part of analysis and the second two criteria focus on the benefits of joining in a monetary area. Criterion six mainly discusses the 32

37 insurance supports of potential members. Criterion seven is about the health of the whole macro economy. All of the criteria here investigate from an economic aspect. Labor Mobility Mobility of production factors includes two basic parts: the labor mobility and the capital mobility. Most academicians believe that the mobility of capital or labor is the key prerequisite for a regional, where applicable, or a global single currency. The initial theory of OCA advocated both labor and capital mobility amongst the countries forming the union (Mundell 1973, Ingram 1969). Though Labor could not move so freely comparing to capital, it has some advantages when countries are confronted with structural shocks such as supply shock. Nevertheless, labor mobility does accelerate the adjustment process and promote the production factors relocation more equally in one economic integration area. Take EU as an example. The Treaty of Rome (1957) secured workers to move freely within the Community. Such freedom of movement should entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment. 16 The legal framework poses no barriers which interfere with labor floating in EU. However, several empirical studies show that labor mobility is rather low in Europe. According to statistical material from OECD, the number of EU national residents in another EU country is 1.5% of the total population. In all other Euro area countries, the proportion of foreigners in the labor force is less than 3%, but in the USA it is around 10%. In Asia, the present migrant trends have been produced by conditions which have largely been shaped by high growth-related productivity forces. People move from sectoral convertibility of traditional growth sectors to export led strategies sectors under international competitiveness and trade patterns. Furthermore, there is a direct correlation between technological relocation, capital investment and migration (Prasai 16 Source: 33

38 1993). Empirical studies show that the speed of adjustment is much faster in Asia (and in ASEAN in particular) than Western Europe. The fastest adjustment to supply shocks is (in descending order) in Japan, Hong Kong, Taiwan, Thailand and Indonesia, the lowest in the Philippines. These results would appear to be consistent with the general impression that labor markets are more flexible in East Asia than Western Europe. Labor mobility is relatively high in Asia. Goto and Hamada (1994) note the extent of migration between the less and more developed East Asian economies and emphasize its responsiveness to changing economic conditions. The share of the labor force by foreign workers can be large. In Singapore, for example, workers from Malaysia, Thailand, Indonesia and the Philippines accounted for fully 10 per cent of employment in the 1980s. The elasticity of supply of Chinese workers to Hong Kong is obviously high. Emigration has been as much as two per cent of the labor force of the sending countries. This is a high level of labor mobility by European standards, reflecting extensive experience with migration and the existence of networks of overseas Chinese (Bayoumi 1996). Presumably it illustrates the region s more flexible labor markets. We could argue however, that labor mobility is far from achievable and hence any discussion on regional or global integration could be premature. Many empirical studies have enumerated much more flexibility in the US labor market than Asia. The reason can be explained by more cultural and language difference between Asian countries than between regions in the US. Plus, there seems to be indirect barriers between Asian countries such as the illegal migration versus the legal residency status. Historical factors are also important barriers to labor mobility freedom in Asia as everybody knows. Despite all the obstacles, more free labor mobility could rescue some of the production factors unbalance relocation problems in Asian countries. And with the 34

39 integration of the financial market and the cooperation of vertically value-added production chain, there are still more advantages for Southeast Asian regions to form common currency area. Wage and Price Flexibility Wage and price flexibility is another important and potential adjustment tool when countries abandon their monetary policy autonomy, which means the exchange rate can not be used to adjust asymmetric disturbances. In the process of EMU integration, it is unfortunate that the debate over Maastricht was diverted from the importance of wage and price flexibility and into discussions of the need for labor mobility among the participating countries and some form of intra-union fiscal transfers. Immigration and fiscal federalism are less direct, more politically demanding substitutes for wage and price flexibility. Neither is needed, if domestic labor and product market flexibility is enhanced. The key is more likely to be wage flexibility, which is essential for a successful functioning monetary union. In the pioneering paper of OCA from Mundell (1961), the rigidity of wage had been highlighted as the basic and main difficulty to a country to avoid economic shocks. Wage formation and its flexibility are also important factors in the macroeconomics of one country. Rigidities concern (1) nominal wage determination; (2) product price determination; (3) the production function (Corden 1978). If one potential country wants to join in a currency area, the wage and price should enjoy a relative degree of flexibility. Wage and price formation are affected by many macroeconomic factors. The wage should be moderated and in line with productivity improvements in each country. And essential flexibility is needed when countries come through unexpected economic shocks. As a basic adjustment tool for economic shocks, wage and price flexibility are restricted in terms of measurement. We normally use unemployment rate to compare it indirectly. 35

40 Different countries have different macroeconomic targets, so they keep different levels of wage flexibility and unemployment rates. The legal environment mostly influences the unemployment rate, thus influencing wage flexibility. In case of disturbance in the labor market, downward pressure is put on real wages when unemployment increases and upward pressure when the unemployment rate decreases. Take Hong Kong as an example. The strong economic recovery created 78,100 jobs in 2004 and reduced the unemployment rate to 6.5% by the end of 2004 from a peak of 8.6% in mid Median monthly employment earnings stood at HK$ 9,500, the same as a year earlier. 17 Meanwhile, the unemployment rate averaged 3.5% in 2004, rising marginally from an average of 3.4% in 2003 in the Republic of Korea. Plus, a steady increase in the share of temporary workers due to structural rigidities in the labor market made a gradual upturn in wage income. 18 Empirical evidence shows that short-term wages are more rigid in low unemployment rate countries such as Republic Korea than in high ones such as Hong Kong. Sound price means more stable and relatively low inflation rate (Rose and Engel, 2003). On second thoughts, a relatively low inflation rate supplied a favorable condition to help regional economic integration. From the statistic numbers, the inflation rates almost enjoyed a downwards trend in recent years in Southeast Asian regions after the financial crisis: like Indonesia from 58.5% in 1998 to 6.1% in 2004, and Thailand from 8.1% in 1998 to 2.8% in At the same time, the domestic economy experienced a renascent period. The growth rate of GDP increased to 4.9% (Indonesia) and 6.2% (Thailand) separately in A Reasonable inflation rate can keep price stability so that resources can be allocated efficiently and a healthier macro 17 Source: 18 Source: Ibid. 19 Source: 20 Source: 36

41 economy can be achieved. This could increase the resistibility of economic shocks. There is another strength which can affect wage and price flexibility all around: the labor market structure. Iversen (1999) develops a simple extension of the Barro and Gordon (1983) framework that predicts a non-monotonic, hump-shaped relationship between inflation and the degree of centralized wage bargaining and provides empirical support for this hypothesis (Daniels, Nourzad, VanHoose 2005). Wage bargaining can influence monetary policymaking and through which policymaking can, in turn, affect negotiated wages, employment, and output, and then the health of whole Macroeconomic conditions. A greater degree of openness is more likely to reduce inflation in nations with less centralized wage bargaining. When the wage-setting process is more centralized, increased openness can be associated with higher inflation. To sum up, wage and price flexibility is one of the basic adjustment tools when countries suffer asymmetric shocks because of a lack of autonomic monetary authority. It is also one of the essential costs for one country when joining in a regional-related common currency area. Asymmetric Shocks The most severe costs from losing monetary policy autonomy should be that the countries could not accommodate exchange rate to meet economic equilibrium and avoid different kinds of asymmetric shocks. We all know that governments can use both fiscal and monetary policies to balance nonequilibrium economy. Fiscal policies are more direct and have a permanent impact. In contrast, monetary policies aim to adjust economy in an indirect and smooth way so that the economy can be pacified itself. If countries decide to join in one common currency area, they have to give their monetary policy autonomy to a supra-national authority, such as the central bank for the whole region. They only have fiscal policy left for adjusting asymmetric shocks. Ultimately, countries which depend on monetary policies more than fiscal ones will 37

42 feel more painful when they undergo asymmetric shocks. This kind of countries should not participate in a common currency area for the costs may be much higher than benefits and deteriorate Macroeconomic conditions. One of the preconditions of OCA theory should be the macroeconomic similarities of member countries. If the participants share macroeconomic dissimilarities, the costs of adjusting asymmetric shocks will be much higher. There are two different kinds of shocks: the aggregate demand shocks and the aggregate supply shocks. The two shocks will be independent if they have separate causes, such as shifts in macroeconomic policy in the case of aggregate demand disturbances and technological innovations in the case of aggregate supply disturbances. Both kinds of shocks could remove macro economy to unbalance and change both the levels of output and price. But presumably supply shocks have permanent effects on the level of output and demand shocks have only temporary effects, though both have permanent effects on the level of prices. Clearly, it is controversial to interpret shocks in such a way. Moreover, not only the correlation of the underlying shocks, but also the size and speed of adjustment to disturbances should be taken into consideration when we measure the costs of harmonizing monetary policy. The larger the shocks, the more disruptive their effects will be and the greater the premium that will be placed on instruments (such as monetary policy) that might be used to offset them. Similarly, the slower the response of an economy to shocks, the larger the costs of permanently fixing the exchange rate and of foregoing policy autonomy. The implication here is that there are three criteria related to macroeconomic shocks: the cross-country correlation (symmetry or dissymmetry), the size of shocks, and the speed of domestic adjustment. Countries experiencing large asymmetric shocks are inappropriate candidates for forming a monetary union, since they are the countries 38

43 where policy autonomy has the greatest utility. These three criteria can be a help for measuring the suitability of countries for participation. Many academics have previously estimated the disturbances of asymmetric shocks. The most favorable method, which was used by Bayoumi and Eichengreen in their paper in 1994, is structural vector autoregressions (VARs). This was developed by Blanchard and Quah (1989) to derive the underlying domestic aggregate supply and aggregate demand shocks, while the associated impulse response functions are used to measure the size of the underlying shocks and the speed of adjustment to shocks. They also believe that aggregate supply shocks are generally more relevant than aggregate demand shocks, because aggregate supply shocks are informative about regional patterns and more related to private sector behavior rather than the impact of monetary and fiscal policies which is included in the demand shocks. Evidence on macroeconomic shocks does not obviously indicate that ASEAN is further than Europe from satisfying the symmetrical shocks criterion (Bayoumi, Eichengreen and Mauro 2000). As discussed earlier, countries are better candidates for a currency area if their shocks are correlated and small, and the adjustments take place rapidly. Shocks are relatively highly correlated across certain ASEAN countries according to their research. In particular, there is a significant correlation of the aggregate supply shocks separately affecting two main parts of Asia: Indonesia, Malaysia and Singapore which are in the Southeast Asia, and Japan, Korea and Taiwan which are in the East Asia, while the Philippines and Thailand experience more idiosyncratic shocks. The second group regions are the regions to industrialize first, and they competed with one another in the American market. Industrialization began later in Indonesia, Malaysia, Hong Kong and Singapore. These countries import less from Japan, compared to Korea and Taiwan (Kwan 1994 in Bayoumi and Eichengreen 1996). The demand shocks of Hong Kong, Indonesia, Malaysia, Singapore and Thailand are 39

44 relatively highly correlated with one another, as they trade heavily with one another. There are parallels with Europe, where the shocks experienced by France and Germany appear to have been relatively highly correlated, while those affecting Italy and Spain were more idiosyncratic. In contrast, the size of disturbances is larger in Asia. This result is notable when Financial Crisis was included. On the other hand, the speed of adjustment is much faster in Japan, Hong Kong, Taiwan, Thailand and Indonesia, with almost all of the change in output and prices occurring within two years (and in ASEAN in particular). The slowest is the Philippines. These results would appear to be consistent with the general impression that labor markets are more flexible in Southeast Asia than Europe (Bayoumi and Eichengreen 1996). Openness of Economy Using the sample of fifty states in USA, McKinnon (1963) deduced that a fixed exchange rate would be needed in a small area where a number of countries have extensive trade relations (or we may say in where a number of countries who have a high degree of economic openness between each other) because of the necessity to maintain the value of liquidity of individual currency in the area, and to facilitate those capital movements. Common currency would be a believable result. Countries of smaller sizes are more likely to or have to specialize in their production to get optimal scale and to import what they do not produce; thereby, the smaller the country is, the more open it has to be. Carlos A.R. (2000) uses trade to GDP ratio (TGDP ratio) to describe the openness of economy as a matter of country size. Based on the data of 1996, several big countries appear on the list of the most closed economies, e.g. Brazil, USA and India; as one of the biggest economical powers, Japan is also listed. Comparably, among the most open economies, we can find a clear example in Singapore, with a distinct TGDP ratio

45 However, having summarized the development of China, Yao and Zhang (2003) believe TGDP ratio understates the openness of this one of the biggest countries in the world, many years after introducing OPEN POLICY. Obviously, a higher degree of economic openness promoted the economic development of China extraordinarily; over the past three decades, by attracting FDI and promoting exports, tremendous economic and social progress has been obtained in the country. Jeffrey A. Frankel and Andrew K. Rose (1998) argue whether the degree of openness of economy can be an effective criteria based on OCA theory because there are two opposing opinions on the side effect of economic openness, which is trade integration. What they found is just the same opinion as European Commission holds, historically, greater integration has resulted in more highly synchronized cycles. Consequently, the openness of economy among the EU member states will reduce asymmetric shocks. Another opinion is that the more open the economy between countries, the higher specialization and this consequently, leads to higher risks of idiosyncratic shocks (Krugman 1993). David Romer (1993) outlined the negative relation between openness and the inflation; he also suggests that the relatively same degree of economic openness between OCA candidate countries is very important. Based on the trade openness indices considering four main aspects of trade policy, the degree of the openness of Southeast Asia, especially the already highly notable East Asia, they get 0.97 and 0.73, respectively, under the range from 0 to 1; comparably, South Asia only gets The Asia Development Bank (1999) states, for East and Southeast Asia to maximize the benefit from the economic openness, they must deeper their cooperation on monetary policy and collectively carry on the multi-area negotiation with other parts of the world by founding a common strategy. 41

46 Industrial and Exports Structure Kenen (1969) believe that countries with a less diversified output structure are subject to more asymmetric shocks, making them less suitable to form a monetary union; in other words, diversification decreases the need to change in terms of trade via the nominal exchange rate and avoid various disturbances in OCA candidate countries, while production and exports in these areas should have a similar structure. Before the forming of the Euro zone, most member states had a relatively diversified production structure (A.Buisán and F.Restoy, 2005), which means that this criterion is fulfilled in these areas sufficiently. However, whether monetary integration can help diversification of production or is more likely to make the countries production structure less diversified is still a controversial topic and needs time for analysis in the future. During the last several decades, because of the low labor cost and abundant natural resources, East Asia has become the material supplier and product processor of the world. Okamoto Susumu (2005) think that the production network has spread across borders in East Asia which means that the division of production processes across borders is highly developed. Zhang Jikang & Lan Yin (2005) compared the production structure in three countries, which are China, Japan and South Korea. They summarize that Japan and Korea have relatively similar economic structure. Service sectors dominate above 60% of GDP in these two countries. But China has a different structure where industries contribute most to GDP. Insurance Mechanism The financial systems of participating members of the currency union will lose as little as possible under the insurance mechanism which functions by inflow of income 42

47 from outside when a member country is hit by asymmetric shocks (Ingram 1969). There are two possible ways for income inflow to function as insurance mechanism for an OCA member country, which are private inflow and official inflow. Private inflow is mainly in the form of financial securities, bonds, stocks and FDI from outsiders, i.e. foreign corporate securities, stocks and bonds etc. held by residents in each country. If the holding amounts of those are huge enough, when economic shocks come, the loss of this country, or specifically saying the loss of domestic residents would be much less than that of when domestic residents only hold all stocks and bonds issued by the country. If that co-purchasing happens often in every OCA candidate country, each country will spread the risk of asymmetric shocks and strengthen their own resistibility. Kenen (1969) stressed the importance of supranational fiscal transformation to release the country which has suffered from asymmetric shocks in a common currency area; but this kind of risk-sharing system is far from easy to be realized since the fiscal transformation was more about political integration. We take a look at United State and Canada, which comprise several partially self-governing states or regions united by a federal government. Their federal fiscal systems insure each state or region against region-specific shocks by fiscal transformation. Barry Eichengreen (1993) thinks this kind of fiscal co-insurance is more likely to be the concomitant of a monetary union than fiscal policy coordination. Southeast Asia financial crisis already challenged the ability of central banks in ASEAN to deal with the same kind of trouble. A lot of problems were exposed during the crisis, e.g. lack of a collaborated mechanism to resolve the crisis on a regional basis. In May 2000, the Finance Ministers of ASEAN, China, Japan and the Republic of 43

48 Korea agreed on the regional financing arrangement: Chiang Mai Initiative (CMI) which settled on an expanded ASEAN Swap Arrangement (ASA) and a network of bilateral swap arrangements among ASEAN countries, China, Japan and the Republic of Korea. ASA is trying to help ASEAN member countries when they encounter temporary liquidity problems by implementing an expanded facility of US$ 1 billion. East Asia countries (ASEAN plus China, Japan and South Korea) have already recognized the interdependent economic relationship among themselves, thus they also set up a network of bilateral swap arrangements and repurchase agreements which contain about 1 trillion USD for the combined foreign exchange reserves to provide temporary financing when a country falls into balance-of-payments difficulties. Also, ASEAN +3 has already agreed on 16 Bilateral Swap Arrangements (BSAs) with about US$35.5 billion combined amount. All these efforts are to strengthen regional self-help and insurance mechanisms since the fallout from the financial crisis of 1998; and from this point, they seem already to be on the road of adopting common currency. Macroeconomic Conditions This criterion considers the whole range of macroeconomic conditions of each member region. We will discuss the economic growth speed of sample regions and the stability of the long-term interest rate. The similarity of the major members of the currency area in terms of their economic development and monetary systems may well have facilitated the adoption of policies to support economic integration. Like the EU when implementing the Maastricht Treaty after 1992, the economies enjoy more similarities; they would be more suitable to form a currency area. Most definitely, economic measures of the suitability of a group of countries for monetary integration are likely to be endogenous, at least in part. For instance, the South European countries such as Italy and Spain suffered from a higher inflation rate 44

49 comparing to the principal parts of the EU such as Germany and France. But empirical evidence showed that the main OCA criteria of the major European countries fell rapidly between 1987 and 1995, indicating that they became better candidates for EMU. This is consistent with the view that the OCA are themselves related to decisions on economic integration, so that the desirability of a monetary union becomes itself partly a function of the underlying political choices. This helps to explain why monetary unions generally correspond to national borders (Frankel and Rose 1998). Compared to EMU, ASEAN or the Southeast Asian regions notably have a more diverse picture of countries in terms of development level and there are many more poor members with a high population. The process of engaging in economic integration would therefore be carefully considered, and the particular characteristics and needs of each ASEAN country should be taken into account. For example, the differences in the degree of economic development are also more pronounced within ASEAN than within the Euro Area. Southeast Asia is composed of countries with different economic development levels. The first group may be the countries which have achieved industrializations in the 1960s to 1980s, just after the Second World War. The support from trading with America and the Western World helped these countries join the international industrial cycles easily and quickly. This also fostered their international trade. Japan was the main representative of this group. Later, Hong Kong, Taiwan, and South Korea also developed fast. The second group consists of the countries developing rapidly after the 1980s, with the transfer of the industrial cycle from developed countries to South East Asia. Most of this group consists of Singapore, Thailand, the Philippines and Malaysia. In addition, the famous stars which have been focused on mostly in recent years are China and India, who are called the engines of the world economy. And they are playing more and more important roles in the development of economy both regionally and worldwide. 45

50 We can see that the situations of economic integration are very complicated in Asia in comparison to the EMU. And the similarity and health of macro economy are one fundamental condition for potential members to consider when establishing a single currency area. So we would like to choose two principal economic targets which are adopted from the Maastricht Treaty to explain the macroeconomic conditions in Southeast Asia and to test if the countries enjoy a narrow scope of differentiation. Another criterion we mention in macro economic condition will be the long-term interest rate. Stable and reasonable interest rate can steady development of the economy, smooth real wage and price levels and increase governments credibility. Therefore, it can give more space for governments to adjust for asymmetric shocks when they are lacking in essential monetary policies. The growth speed of economies measures the strength of whole economic conditions of sample countries. Comparing the GDP of Asian countries, we have China which is in the top five biggest economic bodies in the world and we still have Vietnam which is in the primary stage of its development. Such differences may need time and large levels of expenditure in integration process. Also, countries who want to join in a currency area should consider whether they benefit from it or not. 4.3 Methodology and Data In this part of this paper, we are going to use quantitative methods which are based on OCA theory, to discuss the feasibility for each country to adopt a regional common currency. We will talk about the same 15 countries (ASEAN + 5) as discussed previously using 7 criteria and in each criterion there is/are one, two or three sub-criteria also. For each sub-criterion, Standard Value (STV) is used to make the value of each country comparable, and we can sum up all STV from each sub-criterion for each country by weight to realize the final comparison and ranking. Seven criteria chosen by us are 1) Labor mobility; 2) Wage and Price flexibility; 3) 46

51 Asymmetric shocks; 4) Openness of economy; 5) Industrial and exports structure; 6) Macroeconomic stability; 7) Insurance mechanism. We choose these seven most important criteria that were considered as key indicators by different scholars. They are also quantitatively measurable. When we choose sub-criteria for each criterion, we have to consider data available as well. For instance, we have to abandon correlation between international labor inflow and unemployment rate because the yearly unemployment rates before 1985 for half of countries that we are studying are unavailable. We weighted each criterion and sub-criterion based on their importance. But this kind of tricky allocation is also done based on the attitude of other research, e.g. Guomundur (2002). Seven criteria including fourteen sub-criteria and the weight of each of them can be shown below: Figure Weighted OCA Criteria and Their Sub-criteria Labor Mobility Asymmetric shocks price level&wage flexibity Insurance mechanism Degree of Openness Industrial and export structure Macroeconomic stability 10% 20% 15% 20% 15% 10% 10% Immigrants/P opulation supply shocks Wage flexibility Foreign assets/gdp Regional trade/gdp Production diversification real Growth rate 100% 60% 60% 40% 60% 50% 60% demand shocks Price level flexibility Total Reserve/GDP Total Trade/GDP Exports Diversification interest rate 40% 40% 30% 40% 50% 40% External debt/gni 30% Data that will be used in this study are differently utilized depending on each sub-criterion and different factors and various calculation methods will be used as well. Therefore, we are going to give details of the methodology and data for each sub-criterion respectively. The newest data will be used if it is available, to keep the result accurate. We will use data from 2000 to avoid the unusual negative impact on the data from the South East Asia financial crisis; normally several years average data 47

52 would be used if it is not exceptional. We put all original data in the appendix placed in the end of this paper; other data related information we will put together with the original data with either a data table or a figure Labor Mobility As we mentioned above, the factor mobility contains both labor mobility and capital mobility. Factor mobility is one of Mundell s original OCA criteria advanced in In this part, we will discuss labor mobility and see how it can influence the desirability of one country to join in common currency area. Labor mobility is the flow of people which is thought as the work force moving freely between countries. The effective labor mobility is the net amount of labor force moving from original countries to other countries. In this thesis, we choose one sub-criteria to describe labor mobility, which is the international migrants as a percentage of total population. International Migrants as Percentage of Total Population We describe the size of labor mobility using international migrants as percentage of total population which is defined as the net migration relative to total population. This sub-criterion is the suitable variable to describe the actual amount of labor force moving across countries. The number of international migrants can explain the efficiency of labor mobility among countries. The bigger the figure is, the more foreign labor force there is in the sample country and the easier the economy can be rebalanced to equilibrium when an asymmetric shock occurs. Data used in the study is the migrant stocks for the sample years of which are divided in 5-year sub-groups. The average value is calculated for each country. The figures are from the UN population division, and the figures of Taiwan China are from Taiwan monthly bulletin of labor statistics, (page 116, Table 11-4). As China mainland has the biggest population in the world. The migrant stock is relatively 48

53 small comparing to the total population meaning that China gets a zero average stock. Weights The sub-criterion above characterizes the total amount of labor mobility. It indicates the ability for the labor to move across borders effectively when asymmetric shocks cause damage. Hence, the criterion is assigned a weight of 10% in final ranking Wage and Price Flexibility Wage and price flexibility is another original criterion Mundell brought forward in his article in This criterion has two separate parts, one is wage flexibility, and another is price stability. Wage flexibility refers to the labor force accepting lower real wages in the case of labor market shocks and higher real wages in the case of reduced unemployment (De Grauwe, 2003). Price stability means that the price should be approximately stable in a correspondingly long period which is in the sense of low and stable inflation rate (Flemming 1971). If countries want to cooperate to form a common currency area, this criterion is crucial because it is more important for a country to use these economic adjustment tools to efficiently relocate limited resources. This will push its economy back to equilibrium when its economy has suffered from an asymmetric shock however it can not accommodate with national monetary autonomy. Moreover, stable price levels also can show much healthier macro economic conditions when they abandon national monetary autonomy. On the other hand, wage and price flexibility is also a basic requirement for a government to exhibit credibility. Wage Flexibility The labor market is always sensitive about wage change. But wage levels are rigid in most of the time. If the labor market is hit by an asymmetric shock, the unemployment rate will increase which put a down ward pressure on real wage and the macro economy may be exposed to a regression. However, wage will be flexible when real wages and unemployment rate actively respond to labor market shocks. We will use the correlation of changes in real wage and changes in unemployment rate to 49

54 describe wage flexibility for the sample region. There should be a negative relationship between the variables which means that countries that have a correlation coefficient close to -1 possess a relatively sensitive wage level. The data we use here is real private consumption percentage change from the previous year as the substitute for real wage level. Due to the reason that there are different kinds of wage measurement standards in statistic field and the kinds of wage are also hard to standardize, it is unadvisable to use real wage to compare with unemployment rate in our paper. The real private consumption can also represent clearly the change of personal expenditure. Moreover, it is relatively sensitive to fluctuation when the unemployment rate changes. Therefore, we choose real private consumption percentage change from previous year as the suitable data. The data covers a period from 1989 to We browse data from the website of ADB, Key Indicators Unfortunately we can not find two sample countries real private consumption data which are Brunei D and Laos PDR. However, from the article: Analyzing the Effect of AFTA on Lao Economy (Kyophilavong 2004), we know that the labor sector in Laos is incomplete. There are no time series wage data in Laos. The main income of Lao people mainly comes from wage income. So the two countries will be absent in this criterion. There is also a lack of particular data for some sample countries in particular years, so that the time series will be incomplete, but the main trend remains. Unemployment rate refers to the number of unemployed people in urban areas only, which was found on the website of Asian Development Bank. The correlation period covers 1989 to However, all the data for Japan was not available in ADB. Instead, we found data for Japan from the LABORSTA of International Labor Organization (ILO), which is the database of ILO Source: 22 Source: 50

55 Price Stability Price stability is always seen as a signal of healthy macro economic condition. Inflation rate is used to measure price level in most cases. In a monetary union, the nominal exchange rate is fixed among members or currencies which are pegged with common currency. And members are unable to adjust real exchange rate themselves. Therefore, a low inflation rate relative to the other countries will improve real exchange rate and increase competitiveness in exports. It is also an important principle of the Maastricht Treaty for the EU countries to join EMU. The experience of EMU can give ASEAN+5 a guideline for successful regional economic cooperation. We will use the average Consumer Price Index (CPI) percentage change from previous year to measure inflation in this sub-criterion. The sample period covers 1988 to The data comes from the hard copy of UN s Year Book, 48th edition. However, the data for Japan is from the website of Japanese Statistic Bureau 23. In this sub-criterion, each country s average CPI change in sample periods will be calculated and the lowest one will score highest in total ranking. Weights The wage and price flexibility is commonly viewed to as an important criterion in the traditional OCA theory. Wage flexibility can eliminate the disadvantages of rigidity and increase the labor force mobility and the agility of economic adjustment tools when countries face asymmetric shocks. The wage flexibility will share 60% weight against the price stability which will be 40% weight in this criterion. The total weight of this criterion will then be 15% in total ranking Asymmetric Shocks Asymmetric shocks are the basic costs one country may face when they give up sovereign monetary policies. The asymmetric shocks refer to the economic 23 Source: 51

56 disturbances which are unique for one country. As symmetric shocks are common for the whole currency area, asymmetric shocks will be more costly for the unique country. The reason is that the supranational authorities of one currency area would do little to adjust an asymmetric shock which happened only in one country. It is also unprofitable for a country which always suffers from asymmetric shocks to abandon monetary autonomy. If economic shocks in one currency area are highly positively correlated with member countries, they have a high degree of symmetry. If the correlation is low or negative it means a high possibility for asymmetric shocks. Kenen (1969) first linked the structural characteristics of economies to the characteristics of shocks. He suggested that countries sharing similar industries may experience similar industry-specific shocks. Like we mentioned before, there are two basic kinds of economic shocks: the demand shocks and the supply shocks. A positive demand shock will temporarily increase the short-run production and then gradually return back to the initial level of output, with a permanent rise in prices. The effects of a positive supply shock can permanently raise potential output and decrease prices. Measuring asymmetric shocks is rather complicated work but has been done by many other authors before. In this paper we will adopt the results from Bayoumi and Eichengreen (1994) to test the correlation of asymmetric shocks among sample countries. They used the structural vector-autoregression (VAR) approach to identify aggregate supply and demand shocks in European, Asian and American countries and interpreted shocks with a permanent impact on output as supply disturbances and shocks with a temporary impact on output as demand disturbances. Actually, this model predicted that positive demand shocks should raise prices, whereas positive supply shocks should lower them. Though the model said nothing about the response of prices, the authors thought that these responses were not imposed. They could be thought of as over-identifying restrictions useful for testing the interpretation of permanent output disturbances in terms of supply and temporary output disturbances in terms of demand. 52

57 In the paper we will choose three sample regions-japan, Republic of Korea and Hong Kong-as the target regions and measure the weighted average correlations of the supply and demand shocks between each of the three target regions and the other sample regions. The three target regions are the large economies in Asia and the total GDP accounts to three-quarters of regional total GDP. Obviously, it is much important to experience the same economic cycle with them. According to the shared GDP proportion of target regions, they will get different weights in the results: respectively, Japan 60%, Republic of Korea 25% and Hong Kong 15%. Although China is the second largest economy in our sample regions, it is not involved in the three target regions, for there is no relevant data for the correlation of asymmetric shocks for China as a target region which will influence the correctness of our results. We will use the same data set of Bayoumi and Eichengreen, which is a series of real GDP of our sample regions from 1969 to Then we will use the results of correlations of aggregate supply and demand shocks between sample regions from Bayoumi and Eichengreen to multiply the relevant weights and find the weighted average correlation of supply and demand shocks between target regions and sample regions. Because the country experiencing symmetric shocks should have a positive correlation coefficient (close to 1) with other countries, the country which possesses highest weighted average correlation coefficient will rank highest in these two sub-criteria. A country with a similar economic cycle with other members within the currency area has fewer possibilities to suffer an asymmetric shock. As China, Brunei, Cambodia, Lao, Myanmar and Vietnam are not included in Bayoumi and Eichengreen s study, we are going to estimate the results for those regions. By correlating these countries real GDP and the three target regions real GDP, we can get the Correlation of Real GDP between them. We then estimate the specified two countries (one target region and one sample region which does not have suitable data) Correlation of Supply and Demand Shocks. By using the two regions 53

58 proportional relation of Correlation of Real GDP and the original model of Bayoumi and Eichengreen (1994), we can approximate the changes of these two regions Correlation of Supply and Demand Shocks from other regions figures. For example, if the Correlation of Real GDP between China and Japan lies between Hong Kong and Taiwan, then China will get a Correlation Coefficient in both supply and demand shocks with Japan between the Correlation Coefficient of Hong Kong and Taiwan by using interpolation technique. Correlation of Demand and Supply Shocks with Japan, Korea and Hong Kong High correlation coefficient of both supply and demand shocks with these three target regions, Japan, Korea and Hong Kong, can resonate with more symmetric shocks and implies a smaller cost for abandoning monetary autonomy. The three target regions will gain from being comparative targets for they can get a correlation coefficient of 1 when they correlate with themselves. The data of correlation of supply and demand shocks is from the Bayoumi and Eichengreen (1994) study. The series of real GDP from the years which is used to estimate missing data is from the website of the UN Statistics Division. The data of 1969 comes from the website of International Financial Statistics Browser. The series of real GDP of Taiwan is from the Taiwan Statistical Data Book Weights Because the supply shocks has more serious and long-term affects to economy, this sub-criterion will gets 60% against 40% of demand shocks. Moreover, this criterion plays an important role in all the criteria mentioned in both our paper and the original OCA theory; it will get the highest weight of 20% among the main criteria in the final ranking Openness of Economy As McKinnon (1963) considers, to maintain the value of the liquidity of an individual currency a fixed exchange rate would be needed in the areas which have a high degree of economic openness between each other. Whereafter forming a common currency in 54

59 these areas would be feasible. He uses the ratio of tradables to non-tradables to express the economic openness. With the improvement of measures of the openness degree in an economy, until now most academics have had no doubt about using the Trade to GDP ratio (TGDP ratio) as one index to reveal the degree of openness in a country or area; but there are also some scholars who believe that TGDP could understate the degree of openness (Yao, Zhang, 2003). In this paper, besides TGDP, which is a measure to express openness on a global extent, we are going to use another index, intra-regional trade to total trade ratio, to highlight the importance of intra-regional trade by revealing the degree of openness among countries belonging to the region. Trade to GDP Ratio Trade to GDP ratio is a common ratio which is used to describe how open the economies of the Asian countries we are discussing are to the whole world. The trade we talk about here is the total exports and imports of one country including goods and services. We get most of the Trade to GDP ratios from the International Financial Statistics in International Monetary fund yearbook 2006; among them several countries have one or two years of data unavailable, such as Lao, Viet Nam and Malaysia etc. As there is no data for Taiwan and Brunei, we calculate by our own based on GDP, but we can only estimate the data for Brunei by using merchandise exports which excludes service exports. The GDP we use are from IMF World Economic Outlook and EconStats, in million Dollars under the current price. To avoid the irregular economic impact from financial crisis in , it includes closer 5 year data, from 2001 to Intra-regional Trade to Total Trade ratio Intra-regional trade partner ratio is another ratio we will use here to describe how open the economies of the Asian countries we are discussing are to each other. To get this ratio, the trade amount of each individual country with the other 14 countries will 55

60 be divided by the total trade with the whole world. The more open these countries are to each other, the more favorable economically it is for them to found common currency. We get the data from the Direction of Trade Statistics 2005 yearly book by international monetary fund; the data of Taiwan we calculate based on the Taiwan year book of The intra-regional trade to total trade ratio will effectively show the bilateral trade status in the area we discussed. The time period of the data we used here is from 2001 to 2005 to avoid the unusual East Asia financial crisis in , and we are going to use 5 average ratios for each country to compare the degree of openness. Weights In this study, we weight the degree of openness as 15% as a whole. Two sub-criteria are used to indicate the degree of openness for each OCA candidate country, which are trade to GDP ratio and Intra-regional trade to Total Trade ratio. Basically, to every country, both the external and internal openness are very important for economic development. It has however been argued that higher inter-regional openness, which means higher degree of openness for countries that are going to join optimal currency area to each other, will gain more from creating a common currency. Therefore, we weight inter-regional trade as a percentage of GDP as a bit higher than 60%, against total trade as percentage of GDP as 40% Industrial and Exports Structure Less diversified output structure makes countries more likely to suffer asymmetric shock (Kenan (1969)), the same with the diversification of exports for every country. However, we have to take into account the weight of different industries contribute to the GDP of this country. For the OCA candidate members, if every member has a similar production structure and exports, then it would be easier to get consensus on a economical point to found OCA and realize economic integration, because all countries would be measured by the same scale and the difficulty in phase would be demolished. In this study, we are going to use deviation method to express the scale of 56

61 diversification of production and export by using two sub-criteria respectively. These two sub-criteria are industrial origin as percentage of GDP and export origin as percentage of total exports. Industrial Diversification In the appendix data table A-16 we have percentage contribution to GDP from different industries for each country in five years. Firstly, we calculate the average percentage for each industry of this country, and then we calculate the standard deviation to show the degree of diversification or concentration of production in the same country. The higher the standard deviation for one country, the more vulnerable it is for this country to face asymmetric shocks, because the shock on one industry can destroy the whole economy of this country; thus a country will be ranked on the top if its standard deviation of GDP by industrial origin is the lowest. To quantify the Industrial diversification, we get the data of GDP by industrial origin from Asia Development Band (ADB), except for the data of Japan, which we get from ASEAN-Japan Center (AJC) and Japanese Ministry of Internal affairs and Communications. We are going to use the most recent five year data of 2001 to 2005 to get the average value for each country; several countries only have data from 2001 to 2004 available; since we can only get the 2004 GDP by industrial origin data for Japan, we use this one year data instead of the five year average. All data is at current market price and in domestic currency, if it is not otherwise stated; we think that the unit of currency is neglectable because we want the percentage of different industries contribute to GDP. Moreover, by reason of statistical discrepancy and limitation, for some areas like Hong Kong and Malaysia, the GDP by industry origin is not equal to the sum of breakdown. We solve this problem by adjusting the average number under the item of others, and leave the data for specific industry unchanged. 57

62 Export Diversification If the economy of one country is too much dependent on exporting relatively few principle commodities, it is more likely that this country, in particular a developing country, will suffer more from external shocks by unstable prices in the future. Export diversification strengthens the ability for one country to repel an unstable economic environment, thus the sub-criteria we are going to use here will express if the chosen countries are vulnerable for external economic attack. With the same function as the first sub-criteria, this sub-criterion is also a standard deviation of the average percentage of individual exports relative to total exports to express the concentration or diversification of export for one country, and we will rank the country that gets the lowest standard deviation as the highest. All data used by us, expect Cambodia, is the breakdown of commodity of exports based on The Standard Trade Classification (SITC). Most of the data we get from the 2003 international trade statistics yearbook volume 1; the available time series are from 2001 to The data for Taiwan is from the 2004 year book of Taiwan. Because of the simplification of exports in Cambodia and the unavailability of its data, we estimate the percentage of exports component based on the report of the exports status of Cambodia from 1999 to All data is in million US dollars, if not stated otherwise. Weights We weight production and exports diversification as 10% as a whole, because we consider the natural limitation on the industries of each country, for instance if there is no petroleum resource in one country, then this country cannot have just developed an energy industry; accordingly this country could have other more developed industries. The diversified industries will help one country face asymmetric shocks, but it should not be the most important factor holding this country back from economic integration with others. As the two sub-criteria, industrial diversification and exports diversification are both necessary, and we cannot tell which one is more important, we 58

63 weight these two sub-criteria as equal Insurance Mechanism An insurance mechanism which functioned mainly from the income inflow from outside of one country will mitigate the loss when the country is hit by asymmetric shocks (Ingram 1969). There are two possible way for income inflow to function as an insurance mechanism----private inflow and official inflow. Private inflow is mainly in the form of financial securities, bonds, stocks and FDI from outside of countries, i.e. the holding of foreign stocks, notes and bonds etc. for residents. Basically, official inflow is the fiscal transfer by a supranational economic body to the country hit by asymmetric shocks, namely asymmetric risks are shared by fiscal federalized OCA member countries and in the United States, the federal government dilutes the loss of the state hit by asymmetric shocks by this official inflow transfer. In this study, we are going to use three sub-criteria to indicate the efficiency of insurance mechanism in those fifteen countries. For private inflow functioning as an insurance mechanism, we will use total foreign assets as a percentage of GDP; to express the efficiency of official inflow as economic insurance, we will use international reserves as a percentage of GDP and external debt as a percentage of GNI. Total Foreign Assets as Percentage of GDP The data for total foreign assets is derived from two terms in the International Investment Position (IPP) of 2005, which are foreign direct investment into reporting economy and portfolio investment assets. This data expresses the status of inward foreign direct investment and portfolio investment by residents up to the end of The data of most countries is from the international financial statistics of 2006 except that of Taiwan, which we get from central bank of China, Taipei, and the data of Vietnam, Brunei and Lao which is derived from the Asian Regional Integration Center (ARIC). All data is in million USD. The higher the ratio of Total foreign assets to 59

64 GDP in one county, the less loss this country will receive under asymmetric shocks. International Reserves as Percentage of GDP All data for international reserves in this sub-criterion are from the Asia Development Bank (ADB) except the data of Japan which we get from the Organization for Economic Cooperation and Development (OECD). For every factor we use the average value of five years, , in million US Dollar. The data of international reserves includes gold, national valuation, foreign exchange, reserve position in the Fund, special drawing rights (SDRs). The more international reserves a country has, the stronger this country is when it is hit by asymmetric shocks, i.e. more likely to pay back external debt, keep the stability of domestic currency by fiscal methods, etc. Thereby, we rank the country that has the highest ratio of international reserves to GDP on the top. External Debt as Percentage of GNI We get external debt as a percentage of GNI directly from Asia Development Bank (ADB) except the data of Japan which we get by calculation based on the external debt found from World Resources Institute (WRI). Because the data of 2005 is unavailable for most of the countries we are studying, to keep it more comparable, we use the average value of four years, Countries with lower percentage will be ranked higher because lower percentages indicate that these countries have lower external debt relative to their GNI. When they are hit by asymmetric shocks, they have less burden from the obligation of paying back debt, thus they can recover from shocks more easily than others. Weights We weight insurance mechanism as 20% as a whole in the final weighted calculation. We consider this criterion as one of most important to really express the degree of mightiness under economic shocks. In this study, we use three sub-criteria to indicate the insurance mechanism in each of the OCA candidate countries. Using these criteria, 60

65 more international reserves and less foreign debt make a country more likely to use fiscal methods to reduce the loss after being hit by asymmetric shocks without being disturbed by foreign liability. However, it has been disputed for a long time that too high international reserves leads to more capital flight and we also have to consider the liquidity of those reserves, and zero foreign debt erasing the benefit of financial leverage, etc. On the other hand, more foreign assets can directly release one country s loss during asymmetric shocks by spreading the risk. All in all, that is why the weight of net foreign asset as percentage of GDP is weighted as 40%, and other two sub-criteria are weighted as 30% each Macroeconomic Conditions Stable Macroeconomic conditions and operations were considered more and more important after countries experienced the Asian Financial Crisis in Using the criteria of the OCA, if countries have more similarity of economy in terms of their macroeconomic conditions, they will be easier to integrate together. The Maastricht Treaty which is seen as the sign of the creation of the EU also enumerated many prerequisites for member countries to join EMU, such as the price stability, which means countries should keep a relatively low and smooth inflation rate; the government budget, which should keep a reasonable deficit; the participation in the exchange rate mechanism of the EMS; and the convergence of interest rate. All the treaties implied that the similarity of economies provide clues on whether a country is suitable to be a common currency area member. It also implies the potential difficulties of further convergence. Macroeconomic stability will also increase the attractiveness of a monetary union. The more flexible and sustainable a fiscal policy is, the less the need for countries to rely on monetary policy to respond to asymmetric shocks. And countries with a high inflation history may be more willing to abandon their monetary sovereignty in return for greater government credibility. 61

66 If member countries share a similar stage of economic development, it may be easier to integrate. A significant degree of convergence of outputs seems to be a basic requisite and a natural consequence of catch-up in the process of forming EMU. Furthermore the interest rate convergence mentioned in the Maastricht Treaty pointed out that the nominal long-term interest rate should not exceed by more than 2 percentage points that of the three best performing member states in terms of price stability. Compared with the EU, the situation in ASEAN is more complicated. Countries are in different levels of development. Our economies integrate in an industrial vertical chain instead of in a horizontal plane. The developed country Japan seems like the upriver leader and transfers its industrial cycle to downriver countries. But if countries differ in a large range of macro economics, the process of convergence will not be easy. In this criterion we will measure two fundamental macro economic indices: one is the growth rate of sample regions which is measured by the stability of the growth rate of real GDP and another is the nominal long-term interest rate which indicates the stability of national monetary policies. The Growth Rate of Economy One of the OCA potential rules explains that countries which have a similar size and degree of openness are more suitable for convergence in a common currency area. In this sub-criterion we will measure the standard deviation of annual growth rate of real GDP in sample countries from 1971 to Countries which have a relatively small standard deviation will rank highest. Nominal Long-term Interest Rate Interest rate is always seen as one of the considerations to measure the health of one economy. Stable interest rate means stable national currency value and stable 62

67 monetary situation. In this sub-criterion we will measure the standard deviation of long-term interest rate. A small figure means a smooth monetary policy, and will rank high in this sub-criterion. The long-term interest rate we use here refers to the one-year annual interest rate in nominal term. The data of the growth rate of real GDP comes from the UN Statistics Division covering a period of 1971 to The data of Taiwan is from the Taiwan Statistical Data Book The long-term interest rate is found from the ADB website and the data for Japan comes from the website of Central Bank of Japan. Weights Real growth rate of GDP always implicate the benign economic condition. This sub-criterion will get 60% weights against the 40% of long-term interest rate. Because these two sub-criteria are intrinsic and structural measurements of sample regions macro economy, they will get a small weight of 10% in total ranking Ranking Methods In this study, we choose 7 OCA criteria to test the feasibility of introducing common currency among 15 Asia countries, thus realizing the economic integration in that area. For each criterion, we collect relevant data, use different quantitative methods to express the efficiency of each criterion for each country based on the analyzing and calculation of two or more sub-criteria. We rank these countries depending on standardized value (STV), which can also be called Z value in statistics. To each sub-criterion s STV, some of them prefer higher value; to others, a lower value is preferable. Firstly, we calculate average value and correlation (or standard deviation) for each criterion to express the quantified relation of values among 15 countries. The formula of standard deviation we use in this study is 63

68 ST. Dev = 1 N ( X i X ) N i= 1 2 Note: N: The number of countries, here N = 15; X i : Data for each countries, here i= 1~ 15; X : The average of all data for N countries. Because those sub-criteria have different units and we need to combine all quantified criterion together for each country; to make them comparable, we need STV which is to express the distance of one data point from the mean, divided by the standard deviation of the distribution, called the normal deviate. The STV formula is: STV = X X ST. DEV STV can be either higher or lower than zero; it shows the units of deviation from the mean of data for all countries, and the plus symbol and minus symbol show the direction of deviation. Accordingly, the sum of all 15 countries STV is null. After we get STV, it is possible for us to quantitatively compare and rank the feasibility of all countries to realize common currency, thus achieve monetary integration, by adding all STV we get from different criteria for every country based on different weight. In some criteria, lower STV is preferable, thus we multiply all STV under this criteria with -1 when we do final weighted calculation to avoid neutralization. The reason of that different weight are distributed to different criteria is that not all the criteria and sub-criteria we are going to use in this study are as important as each other, some of them are the main concern for every country before processing common currency, but others are a comparatively subsidiary consideration. Therefore, we rank 15 countries based on the weighted sum STV the higher the country s position is, the more qualified for the country to alter common currency. 64

69 4.4 Finding We are going to quantitatively analyze each sub-criterion in this part, and put all separate finding here. We put our results, which will be one table and one or two figures under each sub-criterion. In the table we have STV value for each country to be prepared for final calculation and ranking. We also rank those countries based on STV for each sub-criteria. In the end, we will compare the sub-ranking for each country with its final ranking as well. Labor Mobility As we mentioned in the empirical evidence, this criterion is the original principle in the OCA theory proposed by Mundell in his pioneering article in In this part we will discuss the findings from our analysis and see which region has the biggest labor mobility at an international level. Factor mobility contains two independent parts: the labor mobility and the capital mobility. In traditional OCA Theory, factor mobility mostly refers to labor mobility which refers to the feasibility of labor force movement across borders. In this paper, labor mobility is measured using the average international migrants as a percentage of the population in sample regions and comparative period from 1960 to Here international migrants refer to the estimated number of international migrants in a country, area or region as of mid-year for each of the years indicated. The number generally represents the estimated number of international migrants divided by the total population expressed as a percentage. It measures the quantities of international labor within one region. Regions which have more international migrants will show they can attract more international labor and more free labor mobility across borders. International migration has contributed to growth and prosperity in both host and source countries. On a regional level, labor mobility has the potential to yield substantial benefits. The evolution of economic integration and experience in Europe and in emerging regional economic integration processes in the ASEAN demonstrate 65

70 that flexible or free movement of labor within areas of economic integration is essential to ensuring progress towards integration, as well as to accelerating rates of economic development (International Labor Migration 24 ). Capital mobility in traditional OCA Theory mostly refers to the movements between member countries. The production factors such as machines and equipments can flow freely which is considered as an insurance mechanism in case of asymmetric shocks. In real world, it is difficult to transfer these factors between countries. And long term capital mobility has a bigger influence than short term capital mobility. That is why we only focus on labor mobility in this study. We use international migrants as a percentage of the total population to measure the quantity and effectiveness of labor force mobility. The data is borrowed from the website of UN Population Division. International migrants as a percentage of total population refers to the net movements of labor force across borders. The reason why we choose this index is that we needed the effective figures to measure labor force mobility, and the net international migrants are the absolute figures in measuring the total migrants. This stock covers the period from 1960 to 2005, separated in 5-year sub-periods. However the number of migrants can not fluctuate drastically. Migrants in any country are restricted by both economic and political conditions. So the figure only shows the trends of international migration in sample regions and we selected data covering a long period from the middle of last century. The international migrants and the effective labor mobility across country borders have a positive relationship which means the more migrants there are the more the labor force moves internationally. 24 Source: 66

71 Table International Migrants as Percentage of Total Population 25 Figure Area AVERAGE STV RANK CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN AVERAGE ST DEV ,00 40,00 35,00 30,00 25,00 20,00 15,00 10,00 5,00 0,00 International Migrants as percentage of total population CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN The Figure shows the trends of migration in our sample countries in recent years. The most attractive countries are Hong Kong, Brunei and Singapore. Hong Kong scores highest, without a doubt, holding an average percentage of migrants of total population as up to 42.85%. After 1997, Hong Kong speeds up the economic cooperation with China Mainland which means more migrants from China than before. Singapore ranks the second with the average migrant amount accounting for 28.18% of total population. Moreover, the growth rate of the migrant stock (see Appendix, Table A-3) of Singapore experiences a stable upwards trend from 0.2% in 1960s to 6.2% in 2000s which is the fastest growth rate in the sample countries 26. Brunei also holds a high migrant percentage up to 27.8%, slightly different in comparison with Singapore. From the original data we can see that Brunei has had a smooth increase in the trend of migrants. Brunei is the third largest oil producer in Southeast Asia and it produced 163,000 barrels per day. It is also the fourth largest producer of liquefied natural gas in the world 27. Due to the nature of non-renewable 25 The abbreviation of countries s names are used here, please check appendix I for the specific abbreviation. 26 Source: World Migrant Stock: The 2005 Revision Population Database, 27 Source: website of Brunei Government, 67

72 resource and heavily weighted oil industry, Brunei has put economic diversification on its national development agenda. As in most developing nations, human resource is central to the successful transformation of Brunei into a diversified industrial economy. Moreover, there is a shortage of skilled workforces in the country. So this may partly explain why there are a big amount of migrants in the country. And we also discovered another interesting characteristic that all of the three countries were once the colonies of, or controlled by, Great Britain historically. That may be another reason in explaining why they rank high in the criterion. From geographic consideration, the three countries are located in the center Pacific Ocean in Southeast Asia and all of them are byland countries, which is another advantage of migration in these countries, especially since Singapore and Hong Kong have a developed shipping transportation industry. Another extreme case appears to be China as it gets zero migrant stocks in the study in all the sample period. We believe this is obviously understood. China has the biggest population in the world so that it has the biggest denominator when we use total migrants to divide total populations. Another reason may also be the culture difference. Chinese is a hard language and migrants may not adapt to this language environment. Furthermore, the Chinese government strictly controls the free movement of people and it is hard to get Chinese visa comparing to other countries. Other countries such as Vietnam (0.01%) and Korea (0.2%) also have similar reasons to China for their few migrants. Also the human right protection of the migrants should also be a difficulty which governments may face when they take over international migrants. Actually, almost all of the sample countries have a migration proportion that is lower than 2%. In EU the labor mobility is still low even though they have policy support and other advantages. Most of the people do not like to leave home and work abroad. Labor mobility could be an obstacle for all the currency areas and it needs time for them to get over it. We should mention here that Asian countries have a large amount of unlawful 68

73 migrants. An investigation from website of Scalabrini Migration Center showed that the estimate of irregular migrants in selected Asian countries added up to more than two million in The data we use here only can partly describe the real situation in Asia. It is a blurry image. Wage and Price Flexibility Wage and price flexibility is another original criterion in OCA theory. It is also a basic adjustment tool for a country to recover from asymmetric shocks. In our paper we choose two sub-criteria to measure it: the correlation of real wage and unemployment rate and the price level measured using CPI. Real wage should have a negative relationship with unemployment rate, which means that the flexibility of real wage is sensitive to changes with unemployment rate and moves in an opposite way. When unemployment rate increases, people would declare lower real wage to keep working and employers may cut wage to decrease labor costs. When unemployment rate decreases, people will ask to increase real wage implying a rising of labor costs. The data used here is the annual change of real private consumption as percentage of GDP. Private consumption measures the spending that people use for essential living. Since wage has different kinds and measurements in different industries, it is hard to use only one single standard to measure real wage. Therefore we choose private consumption as the most suitable data. Another reason is that private consumptions are sensitive compared to public consumptions. This can reflect the true picture of consumption at private level and will change flexibly in case of economic shocks. Because there are two countries missing data (Brunei and Lao), both of them will be eliminated from this sub-criterion. But we could take an alternate way: there are two sub-criteria in this big criterion and each one gets different weights. If one country misses one sub-criterion, it will get full weights in another sub-criterion. 69

74 Table Correlation of Real Wage and Unemployment Rate Figure Area Corr STV Rank CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN AVERAGE ST DEV ,80 0,60 0,40 0,20 0,00-0,20-0,40-0,60 Correlation of Real Private Consumption and Unemployment Rate CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN The Figure shows that most sample countries have negative correlation coefficients between unemployment rate and private consumption. Only five countries have positive relationships. Taiwan ranks highest with a correlation coefficient up to It implies that the real consumption level in Taiwan is more flexible compared to other sample countries. Next comes Myanmar with a correlation coefficient of These two countries stand for the first group in the sub-criterion. Second group will be Hong Kong, Vietnam, Japan, China and Korea. All of them have a correlation coefficient around The Philippines has a figure just a little below zero which is On the other hand there are five countries which have a positive relationship between private consumption and unemployment rate. Cambodia ranks lowest with a correlation coefficient of 0.73, which means that the labor market in Cambodia is rigid and labor force will not move out of labor market even though they will be paid a low salary. Malaysia comes the next with 0.39 correlation coefficient. Singapore and Thailand get the figure around 0.1. We could compare this sub-criterion with the criterion of migration. Singapore, Indonesia, Cambodia and Malaysia, all of them ranks low in this sub-criterion and they also get relatively high migrations. We can imagine that high level of migration is one of the reasons that they have relatively more rigid wage level. 70

75 In this sub-criterion we can see that none of the regions have significant negative relationships between private consumption and unemployment rate. There can be three explanations. Firstly, wage is rigid in real life. There will be no clear effect to real wage level if unemployment rate changes a little. In addition we think employers may correspond to unemployment rate change but they need time. Also, we believe that there should be time lags between the change of unemployment rate and the response of real wage level. Wage can not make an immediate response if unemployment rate changes only a tiny percentage. Secondly, we think there should be some limitations to national labor policy. For example, some countries have restriction about lowest wage level and employers can not pay a salary below it like in Denmark. Different countries have different labor policies so that wage level can not move freely. The labor market structure in each country also plays an important role in determining wage level. Labor organizations are regionally specific and they could be centralized or decentralized. Countries that have either very centralized or very decentralized wage bargaining systems enjoy more flexibility than those with an intermediate systems. Moreover, if price can not move flexibly, neither does wage level. Price stability is another reason for wage rigidity. Finally there may be data errors in this sub-criterion. We use real private consumption as a substitute for real wage here. That may bring some statistical errors and lead to imperfect conclusions. Price stability in original OCA theory referred to the low and stable inflation rate. It is seen as a signal to show government credibility. If inflation is at a relative low level, it indicates that the country has a healthy macro economy. Many indices can be used to measure the inflation rate. Most famous are CPI, Producer Price Index (PPI) and Personal Consumption Expenditures Price Index (PCEPI). The PPI measures average changes in prices received by domestic producers for their output. It has stagnant effects for producers who need time to transmit price changes to consumers. PCEPI is a nation-wide indicator of the average increase in prices for all domestic personal consumption. In comparison to the CPI, PCEPI uses current period quantities as the 71

76 weights rather than a fixed consumer basket. In this sub-criterion we use CPI to measure inflation rate, for this purpose, CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers 28. It can track price changes more precisely. Table Average CPI, % change from previous year Area Average STV Rank CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN AVERAGE ST DEV Figure ,00 35,00 30,00 25,00 20,00 15,00 10,00 5,00 0,00 Average CPI, % change from previous year CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN The CPI average percentage change from previous year shows the inflation trend of each sample country. A country which has a low average CPI level means that the inflation there is relatively low. In a common currency area, countries prefer low inflation to increase the competitiveness of their export goods because their real exchange rates can not fluctuate freely. In Figure 4.4.3, we can see that four countries out of fifteen have shown a remarkable increase in their average inflation, with Cambodia at 37.74% ranking last and followed by Laos at 30.08%. As we can see from the original data that Cambodia had high inflation in the beginning of 1990s which may be the reason it ranks last. Lao got a higher CPI during the Southeast Asian financial crisis and in 1999 its CPI even rose to %. Myanmar and Indonesia also have a higher increase in inflation levels with figures above 10%. We can see from the original data that Myanmar suffered from high inflation after the Asian Financial Crisis, with CPI rising annually by more than 20%. 28 Source: 72

77 Other regions show relatively low inflation with Japan at 0.82% ranking top in this sub-criterion. The sample period covers from 1988 to 2005, and we all know that during the 1990s Japan did not develop as fast as previously. It experienced a regression. In our original data, Japan even showed a negative change of CPI which led to deflation in some sample years. That may be why the CPI of Japan is relatively low in our study. Actually other sample countries all show a mild increase of CPI and nine out of fifteen countries CPI changes are lower than 5%, indicating a relatively stable price. As what the EU did before they formed a Monetary Union, the average CPI level should fluctuate in a range around the average of the top three most stable price level countries. We could also theorize that if our sample regions form a single currency area in the future, stable price level and reasonable low inflation rate are necessary. It seems more important to find suitable CPI level but not an absolutely low one. Asymmetric Shocks As we mentioned in our empirical evidence, many authors have done research on correlation of asymmetric demand and supply shocks between selected countries. Bayoumi and Eichengreen (1994) used the structural VAR analysis which was developed by Blanchard and Quah (1989), to identify if the North America, East Asia, South America and the EU can form common currency area respectively. Their result showed that three sets of countries are plausible candidates for common currency area based on their macroeconomic disturbances and responses. They are a Northern European group (comprised of Germany and neighbor countries), a Northeast Asian bloc (including Japan, Korea and Taiwan) and a Southeast Asian area (Hong Kong with Indonesia, Malaysia, Singapore and Thailand). In our paper the results from Bayoumi and Eichengreen are adopted to describe the correlation of asymmetric shocks between sample regions. We chose three economies 73

78 as target economies which are Japan, Korea and Hong Kong. The three economies are relatively large economies and their total GDP accounts to almost three forth of total GDP in sample regions. We then regard them as a potential currency area and give them different weights according to their size in internal GDP. We calculate the weighted correlation coefficient between each target economy and all the sample regions and get the weighted correlation coefficient of aggregate supply and demand shocks for every sample region. If the sample region gets a positive correlation coefficient, it means that it paces well with other regions in the area and may not have the chance to be hit by an asymmetric shock and vise versa. Regions with correlation coefficients close to one are suitable members for forming a common currency area. Table Correlation of Aggregate Supply Shocks Figure Area Corr STV Rank CN 0,55 1,13 2 JP 0,76 1,79 1 KR 0,53 1,09 4 TW 0,54 1,12 3 HK 0,34 0,48 5 BN 0,21 0,10 7 KH -0,07-0,77 12 ID 0,14-0,13 8 LA -0,14-1,00 13 MY 0,05-0,41 9 MM -0,27-1,40 14 PH 0,04-0,44 10 SG 0,04-0,44 11 TH 0,33 0,46 6 VN -0,33-1,59 15 AVERAGE 0,18 0,00 ST DEV 0, Correlation of Aggregate Supply Shocks CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN From Figure we can see that Japan, China, Taiwan and Korea have correlation coefficients above 0.5 which means that they suit each other well in the case of aggregate supply shocks. Another potential group may be Hong Kong, Brunei, Indonesia and Thailand with correlation coefficients between Malaysia, The Philippines and Singapore have a similar correlation coefficient of around The rest of the sample countries get negative correlation coefficients with Vietnam at the lowest to -0.33, indicating that they are better off choosing to stand outside of the 74

79 potential common currency area. Comparing our results with Bayoumi and Eichengreen s, we notice that the Northeast bloc has no change apart from the addition of China as a new member. Our results separate the Southeast bloc into two potential areas: one is Hong Kong, Indonesia and Thailand plus new member Brunei; the other is the last two of the South East bloc plus the Philippines. This criterion is the most important one in our paper and examines the cost of abandoning national monetary autonomy. High correlation of supply shocks means high degree of symmetric shocks and low degree of asymmetric shocks. High positive correlation is preferable in this criterion. The three target economies benefit from being comparative samples because they will get correlation coefficient of one when they compare with themselves. The four sample countries: Cambodia, Lao, Myanmar and Vietnam got negative figures with Vietnam lowest at The reason may be that the economies in this region are relatively small and close and the economic gap is large. Though they are developing speedily recently, they still need time to catch up with other countries. Table Correlation of Aggregate Demand Shocks Figure Area Corr STV Rank CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN AVERAGE ST DEV Correlation of Aggregate Demand Shocks CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN 75

80 A similar thing happened with the correlation of aggregate demand shocks. From Figure we discover that the four countries which have negative correlation of supply shocks also have negative correlation of demand shocks and also that Vietnam rank lowest at Japan, Korea and Hong Kong are closely correlated with correlation coefficients higher than 0.3. Another potential group includes China, Indonesia, Malaysia and the Philippines with correlation coefficients around 0.2. The last group may be Taiwan, Brunei, Singapore and Thailand with correlation coefficients around 0.1. Comparing our results of correlation of supply and demand shocks, we discovered that only Taiwan gets a relatively higher correlation of supply shocks but lower correlation of demand shocks. Other countries have slight changes in these two sub-criteria. Finally, the last four countries have negative correlations both in supply and demand shocks. The demand shock is not as important as supply shock since it just affects economy in a short-run and can be adjusted easier than supply shock. Openness of Economy No matter whether before or after the establishment of European Union and the realization of common currency, nobody doubts the degree of openness for each of the EU countries is very high, thus one of the OCA criteria for economic openness brought forwards by McKinnon (1963), is broadly satisfied. As we discussed in previous chapters, the external openness of one economy will contribute to the foundation of the OCA by reducing the need of exchange rate mechanism to adjust for the impact from external price on domestic price of goods. However, the internal openness of OCA candidate countries to each other would be more important for the integration of the discussed area. In this paper, we use two variables to relate the degree of economic openness of the 15 countries discussed here. One is the ratio of total trade (imports and exports of goods and service) to GDP; another is intra-regional trade to total trade ratio. We take 76

81 the latter one as a more important variable for founding common currency in the area. Table Average Total Trade/ GDP % Figure Area percentage STV Rank CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN Average ST DEV Average Total Trade/GDP % CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN From Figure we can clearly find Singapore has the highest average total trade as percentage of GDP which is almost quadruple its GDP; Hong Kong also follows with more than triple of its GDP i.e %; the ratio of Malaysia is also distinguished with other countries as 213.2%. Actually, with the exception of these three countries plus Myanmar and Japan which have the lowest average total trade as percentage of GDP, all other countries have more or less the same ratio extended from 50% to 100%. In addition, Taiwan, Brunei, Cambodia, Philippine, Thailand and Vietnam these 6 countries have almost the same ratio which is around 100%. We can say that except for Myanmar and Japan, almost all other countries are quite open in terms of their total trade to GDP ratio. Asia has been a rapidly developing region in the last several decades, first comes Asia four dragons, then its four tigers, and finally the emerging economies of China and India. Having all of these we cannot ignore the role of the inside trade of Asia and the enhancement of trade relation among Asia countries will help to integrate the whole area. Asian countries also are aware of the importance of economic integration for the 77

82 development of each of their own countries. After the founding of Association of Southeast Asian Nations (ASEAN) to promote more free trade among the member states, ASEAN also tried to enhance the relations with China, Japan and South Korea. Several special reciprocal trade treaties have been made during several summits in recent years. Table Average Intra-region Trade/Total Trade Figure Area Percentage STV Rank CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN Average ST DEV ,00 80,00 70,00 60,00 50,00 40,00 30,00 20,00 10,00 0,00 Average Intra-regional Trade/Total Trade CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN After so many years of enhancing the bilateral trade inside ASEAN + 5 we can see from Figure that except for Japan and south Korea, almost all other countries individual regional trade counts as near or above fifty percent of their own total trade; among them, Lao republic has the highest ratio of 77.2%, Brunei and Myanmar also have ratios above 70%. We can say those fifteen countries have intensive reciprocal trade relationships with each other and they are main trade partners to each other. Thus for the fifteen countries we are studying, the degree of openness to each other is very high which will serve to intensify their regional economic integration. Although Japan is an exception, still the tables and figures above verify the relation between the country s size and foreign trade in general. The smaller size counties are more likely to or have to specialize more in their production to get optimal scale and 78

83 import what they do not produce. Therefore, the smaller the country is, the more open it has to be. As we can see that small areas like Singapore, Myanmar and Hong Kong have a distinguished high ratio, thus they are ranked in the top five for each criterion. Industrial and Exports Structure Less diversified output structure makes country more likely to suffer from asymmetric shock (Kenan 1969). If every member has a similar production structure and exports, that would be easier to get a consensus on economic points in order to found OCA and realize economic integration because all countries will be hit by the same scale and get rid of the difficulty in this phase. Euro Zone Members have satisfied this criterion. In this study, for 15 Asia countries, we are going to use two sub-criteria which are, by using deviation method to express the concentration/diversification, based on industrial origin as a percentage of GDP and exports origin as a percentage of total exports. The country with the lowest standard deviation will be ranked as the highest which means their production or exports are diversified better than others in order to deal with asymmetric shocks. Table Standard Deviation of Figure Average GDP Contribution by Industrial Origins AREA ST DEV STV Rank CN 15,0 1,50 14 JP 9,6-0,31 8 KR 8,6-0,63 6 TW 8,5-0,66 5 HK 9,4-0,38 7 BN 14,0 1,18 12 KH 10,6 0,03 11 ID 8,1-0,80 3 LA 14,8 1,42 13 MY 8,3-0,74 4 MM 16,8 2,10 15 PH 7,3-1,06 2 SG 9,8-0,23 10 TH 9,6-0,31 9 VN 6,9-1,19 1 Average 10,5 0,00 ST DEV 3,0 20,0 15,0 10,0 5,0 0,0 Figure ,00 2,00 1,00 0,00-1,00-2,00 ST.Deviation of average GDP contribution by industrial origins % CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN Standard Value CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN 79

84 From Figure we would say that except from China, Brunei, Lao and Myanmar, most of the other countries have more or less a similar standard deviation of GDP from different industrial origins. However, standard value Figure can make it clearer, from where we can see there actually are dramatic differences among those countries. Vietnam is ranked as No.1, because its sub-criteria deviate furthest which means the industrial structure in Viet Nam is distributed more equally than in others. However we cannot say it is the most reasonable distribution. Among these countries, China, Brunei, Lao and Myanmar have outstandingly high average standard deviation (around 15%) which reveals that in these four countries the scale of industrial diversification are the lowest. For instance, in China a large part of GDP depends on the contribution from manufacturing. Oppositely, Brunei mainly depends on its mining industry and it has almost no manufacturing industry of its own. Brunei, therefore has to depends on imports. The agriculture in Myanmar is extremely important and contributes to over 53.8% of GDP every year. It is a similar situation in the Lao republic where almost half of GDP comes from agriculture. The disadvantage of this can be illustrated by a simple example: if in one year natural disasters happened frequently, the production of agriculture in these countries will be reduced dramatically. Consequently their economy will be destroyed and it will be hard to get assistance from other industries. Table Standard deviation of average exportation terms AREA ST DEV STV Rank CN 14,2-0,39 7 JP 20,7 0,66 13 KR 18,6 0,33 11 TW 18,2 0,25 10 HK 16,0-0,10 8 BN 27,7 1,82 14 KH 30,6 2,29 15 ID 8,5-1,33 1 LA 11,7-0,80 3 MY 17,6 0,17 9 MM 12,4-0,69 5 PH 9,3-1,19 2 SG 19,0 0,39 12 TH 12,8-0,62 6 VN 12,0-0,76 4 Average 16,6 0,0 ST DEV 6,1 Figure Standard Deviation of Average Exportation Terms ,0 30,0 20,0 10,0 0,0 CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN Figure Standard Value 3,00 2,00 1,00 0,00-1,00-2,00 CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN 80

85 Figure show us the standard deviation of average exportation terms where the lowest standard deviation means the most diversified exportation, which is ranked as the highest. India, Philippines and Lao are the first three countries that have the most diversified exportation among fifteen areas being studied. Cambodia has the highest standard deviation followed by Brunei which has the second highest. From this data we find mineral fuels are an extremely important export commodity for Brunei and account for above 90% of total exports. Similarly, garments are the main exports of Cambodia which account for around 96-97% of exports. Both countries are too dependent on one kind of export term, thus the unstable price of this term will bring huge economic shocks into these countries. Japan and Singapore also have a small scale of exports diversification. Insurance Mechanism Two possible ways for income inflow to function as an insurance mechanism are private inflow and official inflow. Private inflow is mainly in the form of foreign financial securities, bonds, stocks hold by residents and FDI from outside. Basically, official inflow consists of fiscal transfer by a supranational economic body to a country hit by asymmetric shocks. But in our paper there is no kind of supranational institution like this existing among the countries we are studying. Thus, their own governments play the same role as supranational economic body by making use of their own international reserves. There are three sub-criteria in this study which are used to indicate the efficiency of insurance mechanisms in those fifteen countries. For the private inflow functioning as insurance mechanism, we will use total foreign assets as percentage of GDP. To indicate the ability of one country to handle possible asymmetric shocks and express the efficiency of official inflow as economic insurance, we will use international reserves as percentage of GDP and external debt as percentage of GNI. 81

86 Table Total Foreign Assets as Percentage of GDP Figure Area Percentage STV Rank CN 39,4-0,35 8 JP 0,1-0,62 15 KR 22,6-0,47 11 TW 57,1-0,23 7 HK 564,6 3,26 1 BN 93,8 0,02 3 KH 60,6-0,20 5 ID 5,3-0,58 14 LA 18,1-0,50 13 MY 38,0-0,36 9 MM 59,5-0,21 6 PH 21,5-0,47 12 SG 262,7 1,18 2 TH 35,2-0,38 10 VN 77,3-0,09 4 Average 90,4 0,00 ST DEV 140,5 600,0 500,0 400,0 300,0 200,0 100,0 0,0 Total Foreign Assets/GDP 2005 CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN From Figure , it is clear that among all the countries, Hong Kong, as one of most important world financial and business centers, has distinguished the highest total foreign assets as percentage of GDP at the end of 2005 with 565.6%. This is clearly shown in Table This means that in the case of asymmetric shocks, the loss in Hong Kong will be partaken of by the whole world. Singapore also has very high ratio of total foreign assets to GDP with 262.7%. The ratios of all other countries are below 100%. From Figure , we can see examples of very low ratios of total foreign assets to GDP in Japan with only 0.1% and Indonesia with 5.3%. In reality, Japan is one of the main investors in the world, not an investment target. China and Vietnam are the NO.1 and NO.2 favorite investment targets in the Asia area based on GDP value; this can explain why the ratio of Vietnam is relative higher. 82

87 Table International Reserves as Percentage of GDP Figure Area Percentage STV Rank CN 32,2-0,28 6 JP 14,6-0,50 13 KR 26,0-0,35 8 TW 67,3 0,16 4 HK 338,6 3,55 1 BN 72,9 0,23 3 KH 23,2-0,39 9 ID 14,6-0,50 12 LA 9,4-0,56 14 MY 46,2-0,10 5 MM 6,6-0,60 15 PH 20,9-0,42 10 SG 98,3 0,55 2 TH 29,9-0,31 7 VN 15,2-0,49 11 Average 54,4 0,0 ST DEV 80,1 400,0 350,0 300,0 250,0 200,0 150,0 100,0 50,0 0,0 International Reserves as percentage of GDP average of CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN We use two sub-criteria to indicate the efficiency of official inflow works as an insurance mechanism. Firstly, if a country has enough international reserves, it is more likely for this country to moderate the loss from asymmetric shocks and to avoid extended loss also by fiscal transfer. Figure shows International reserves as a percentage of GDP using the five year average data from 2001 to Again, Kong Kong has a very high percentage of above 300%, followed by Singapore with international reserves of almost as 100% of GDP. International reserves can be used to avoid a collapse of export price, change of investors sentiment, etc. Although from the Table , Most of the other countries except Taiwan and Brunei, keep international reserves around 30% of GDP, some countries have even less, for example Myanmar only has 6.6% which is the lowest international reserves as a percentage of GDP. Actually, the data from Asia Development Bank (ADB) shows us since South Eastern Asia financial crisis in 1998, most of countries apparently have started to increase their international reserves to defend against possible crisis in the future, especially countries hit harder by crisis in 83

88 1998 like Thailand, South Korea and Malaysia. China has become the country which has the most international reserves in the world. Table External Debt as Percentage of GNI Figure Area Percentage STV Rank CN 15,2-1,02 2 JP 30,1-0,54 6 KR 25,9-0,67 5 TW 17,8-0,93 3 HK 33,5-0,43 7 BN 0,0-1,50 1 KH 74,0 0,87 13 ID 68,3 0,68 11 LA 120,8 2,37 15 MY 51,5 0,15 10 MM 86,8 1,28 14 PH 73,1 0,84 12 SG 22,4-0,79 4 TH 44,0-0,09 9 VN 39,6-0,23 8 Average 46,9 0,0 ST DEV 31,2 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0 External Debt as percentage of GNI Average of CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN Countries with higher external debt will be in an even worse situation when they are going through asymmetric shocks because they have to consider paying back debt before they try to use fiscal methods to reduce loss. We get external debt as percentage of GNI directly from the ADB database. From Figure we can find that, except for Brunei and Singapore, most of other ASEAN member countries have quite high external debt percentage as GNI, among them Lao republic has the highest percentage with 120.8%, followed with Myanmar as 86.8%. Except for Brunei which does not have external debt at all, not surprisingly, China is ranked as No. 1 among other countries, which has the lowest debt percentage as GNI since as a big country, China has higher GNI (not GNI per Capita though). Japan is known as one of the largest creditor nations. Other areas like South Korea and Taiwan have around 20% external debt as percentage of GNI which can not be considered high if we think about the European countries who based on Maastricht treaty cannot have external debt exceed 60% of GDP. 84

89 Macroeconomic Conditions The spirit of this criterion comes from the Maastricht Treaty which was signed on February in Maastricht, Netherlands after final negotiations in December 1991 between the members of the European Community. The Treaty entered into force on November and most importantly, it led to the creation of the European Union. The EU was the result of separate negotiations on monetary union and on political union. The creation of the euro which is now the common currency in EMU was preceded by this treaty, and it laid down the details of prerequisite convergence criteria which should guide the European Community in taking decisions on the passage to the third stage of economic and monetary union. There are four aspects to criteria mentioned in the Maastricht Treaty: the criterion on price stability; the criterion on the government budgetary position; the criterion on participation in exchange rate mechanism and the criterion on the convergence of average nominal interest rates. Relating to macroeconomic conditions, the Maastricht Treaty lays out the restrictions member countries should measure up before they integrate into the common currency area. In ASEAN we should also consider macroeconomic situations and check if potential regions are suitable for a currency area. In this criterion we take two sub-criteria to measure the conditions and operations of member regions macro economy. One is the growth of economy measured by standard deviation of the annual growth rate of real GDP; another is the standard deviation of long-term interest rate. 85

90 Table Standard Deviation of Annual Growth Rate of Real GDP Figure Area ST DEV STV Rank CN 3,82-0,57 3 JP 2,40-1,76 1 KR 3,91-0,49 5 TW 3,84-0,55 4 HK 4,56 0,05 10 BN 6,98 2,09 14 KH 7,02 2,13 15 ID 4,20-0,25 7 LA 4,46-0,03 9 MY 4,91 0,35 13 MM 4,66 0,14 11 PH 3,53-0,81 2 SG 4,04-0,39 6 TH 4,28-0,18 8 VN 4,81 0,26 12 AVERAGE 4,50 0,00 ST DEV 1,19 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 Standard deviation of annual growth rate of real GDP CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN From the original data (see Appendix Table A-7 and Table A-23) we can see that most of the sample regions develop fast in the observation period in China has the fastest growth speed of 8.35% annually and next comes Taiwan with 7.43%. Most of the sample countries have a growth rate higher than 3% except Brunei with 2.86% and Cambodia with 0.43%. Moreover, we can see clearly from Figure that most sample countries enjoy a relatively stable growth with a standard deviation of between 2.40 and Japan ranks highest in this sub-criterion which means that its growth rate increases mildly and indicates macroeconomic stability. The Philippines, China, Taiwan, Korea and Singapore rank after Japan with standard deviation of between 3.5 and 4. With standard deviation of 6.98 and 7.02, Brunei and Cambodia rank respectively as the last two in this sub-criterion implying a changeable growth rate. The rest of member countries have a standard deviation of between 4 and 5. As we can see from the results here, most of the ASEAN countries grow steadily in this long observation period. The other five regions also have a similar situation except that Japan gets remarkable preponderance in this sub-criterion. 86

91 Table Real GDP Presented by Sub-period from Area AVERAGE CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN Source: From UN Staistics Division, Data of Taiwan is from Taiwal Statistical Databook, 2006 We can also compare the average of real growth of GDP. Table shows the 5-year trend of GDP growth rate for each sample country. Most of ASEAN countries enjoyed a fast development period in The fastest is Malaysia with an average growth rate to 9.47, and Singapore is up to But in , they were influenced by the Financial Crisis. And Thailand got the largest decrease from 8.63 to However, the adjustment is quick. In , Thailand increased its growth speed to And most of other countries also got an increased trend of GDP growth after the Financial Crisis. Things are different in other five sample regions. After the enforcement of openness policy, China develops fast. In 1980s, the average speed reached to nearly 9%. And from 1991 to 1995, the average growth rate even reached to 12.34% which was the highest among sample countries. Due to the comparatively closed national financial market, China was not hurt much by the Financial Crisis. So we could see a mild increase in annual growth rate of real GDP with an average of 8.25% in and 8.65% in But Japan, Korea, Taiwan and Hong Kong experienced a 87

92 decrease phase after 1990s and Japan even got an average growth rate lower than 1%. This is really an opposite way comparing with ASEAN members. Because of the vertical value-added production transformation mechanism in industry, most of ASEAN countries received industrial transform from Japan and four Asian Dragon regions (Taiwan, Hong Kong, Singapore and South Korea) during 1990s. This may be the reason that ASEAN develop fast in recently years. Due to more and more compact economic bilateral cooperation, there should be a chance for Southeast Asian regions to found a single currency area in the future. We can conclude from the above results that most Asian regions have macro economy stability. And relatively stable Macroeconomic conditions and operation reduce the difficulties in the process of convergence. The convergence of long-term interest rate refers to potential member countries nominal long-term interest rate which should fluctuate in a target range. The data we use here consists of nominal one-year interest rates. A stable interest rate means stable national currency value and stable monetary policies. If sample regions do not need monetary autonomy as much to adjust asymmetric shocks, they could abandon it with less hesitation. The standard value of long-term interest rate could measure sample regions stability of interest rate. Regions which have a low standard value of interest rate will be inclined to have stable macro economy. We separated the whole period into 3 sub-periods with each one including 5 years. As the Asian Financial Crisis is included in the sample period, we would like to see the differences in longer periods and eliminate the affect from it. We first get the average interest rates for sub-periods then calculate their standard deviation. 88

93 Table Standard Deviation of Long-term Interest Rate Figure Area ST DEV STV RANK CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN AVERAGE ST DEV 0.93 ST DEV of Long-term interest rate ,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,00 CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN From Figure we find that China and Vietnam have a standard deviation below one, which means that both of the countries implement relatively stable monetary policies. China ranks highest with 0.69 and followed by Vietnam at In the original figure we can also see that both of them did not change interest rates much during the Financial Crisis period. Actually, they were not seriously affected by the Financial Crisis due to relative closeness financial markets. The second group is composed of Japan, Brunei, Cambodia, Malaysia, Myanmar and Singapore and has a standard deviation of around 1.5. Japan decreased its interest rate sharply in the sample period from an average of 2.83 in the beginning of the 1990s to in the beginning of 2000s. The reason may be that in our sample period Japan suffered an economic regression with low economic growth rate and low domestic demand. The Japanese government lowered the interest rate to stimulate domestic consumption. The third group Korea, Taiwan, Hong Kong and The Philippines has a standard value around 2.5. Korea was impacted massively by Asian Financial Crisis and as we can see the average interest rate decreased greatly in the 2000s. The last three countries: 89

94 Indonesia, Lao and Thailand have a standard deviation of above 3 implying that their interest rate fluctuated most in sample periods. Indonesia and Thailand raised their interest rates during the Financial Crisis, so the standard deviation is higher. Actually, almost all of the sample regions have a decreasing interest rate during our sample period. Most of them lowered interest rates after the financial crisis. Higher interest rate may mean a higher inflation rate and affect the stability of price level. Countries which can converge to a common currency area should regulate their long-term interest rate to a target range which does not exceed many of the best performing member countries in terms of price stability. In our original data we can see that Indonesia and Philippines have an obviously higher level of long-term interest rate, which means they should accommodate their interest rate to a low level to adapt with other members. This criterion measures potential difficulties that may emerge when they exercise convergence process after they decide to compose common currency area. Even EMU did not live up to all the OCA criteria in the beginning of its establishment. The success of a single currency area needs every member s efforts; not only economic but also political. That is the reason why we describe OCA theory as more endogenous than exogenous. It can also explain why we choose this criterion as a basic standard which has a 10% weight in total ranking. Total Ranking In the previous sections, we have quantitatively discussed each sub-criterion using different methods, but for every sub-criterion, we get the same value for each country. That is the Standard Value (STV), and this makes it possible for us to integrate all STV from each criterion for every country, rank all countries and make comparisons. In some criteria, the STV for each country was to be multiplied by -1 since for this criterion lower STV is preferable. We calculate the weighted total STV for each country based on the weight we put on each criterion, that is, for each criteria of each 90

95 country we use the formula below to get STV 1, STV 2...STV n. α% is the weight of one criteria, β% and γ% are the weight of each sub-criteria. STV 1 = α% (β% STV of sub-criteria 1 + γ% STV of sub-criteria 2) Weighted Total STV for each country = STV 1 + STV 2 + STV n. Table Figure Area Weighted Total STV Rank CN 0,12 6 JP 0,30 3 KR 0,09 7 TW 0,26 4 HK 1,18 1 BN 0,16 5 KH -0,90 15 ID -0,17 11 LA -0,51 14 MY -0,06 8 MM -0,40 13 PH -0,07 9 SG 0,40 2 TH -0,14 10 VN -0,25 12 Total 0,00 1,50 1,00 0,50 0,00-0,50-1,00-1,50 Total Weighted Score CN JP KR TW HK BN KH ID LA MY MM PH SG TH VN From Figure we can easily find except for Brunei and Singapore, the weighted total STV of all other ASEAN member countries have low rank in the last criterion. Before we continue to further detection we need to have a look at ranking comparison Table

96 Table Ranking Summary Area Total ranking Sub-Ranking by 14 sub-criteria (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) HK SG JP TW BN CN KR MY PH TH ID VN MM LA KH Note: in the table (1) (14) respectively expresses: (1)labor mobility; (2)&(3) ability to defending supply shocks and demand shocks; (4)&(5) wage and price flexibility; (6)foreign assets/ GDP; (7)reserves/GDP; (8) -external debt/gdp; (9)&(10) situation of regional trade and total trade; (11)&(12)diversification of industrial and exports; (13)&(14) stability of real growth rate and interest rate. From Table , Hong Kong is ranked as No.1 by weighted total STV with an impressive As an international financial center, it is rational that Hong Kong is on No.1 based on the ratio of foreign assets and total international reserves to GDP which indicate its huge potential ability to deal with economic shocks. As No. 2 in the criteria of total trade to GDP ratio and No.4 in the criteria of regional trade situation, Hong Kong has strong trade relations within and outside of South East Asia, thus adopting common currency will bring more benefit for it than for others, e.g. lower the exchange rate risk. It is also ranked as No. 1 in labor mobility as well. However we cannot ignore the fact that Hong Kong is ranked as 9 and 10 for the two sub-criteria of Macroeconomic stability, which shows that the macro economy has fluctuated a bit too much in comparison with other countries in this region since Hong Kong has a foreign oriented economy and is more sensitive to the external impact. 92

97 Singapore is the first of the countries with a total weighted STV of less than 1. Singapore is ranked as No. 2 by weighted total STV with 0.4. It is very clear by looking at Table , Hong Kong and Singapore are dominated in four sub-criteria; the reason for this is that both countries are the most openly economic bodies in the entire Asia area. Singapore has the similar economic basis as Hong Kong, but its regional trade intensity within South East Asia is far from Hong Kong at No 11. Besides, we can see Singapore is ranked in the last six under six criteria, e.g. it has less diversified industrial and exports structure. Actually the Singapore government was aware of this since the 1997 South East Asia financial crisis, when it was hit by asymmetric shocks. Since then, Singapore has made some reforms to try to change the industrial structure in the near future. Table Ranking deviation Area HK SG JP TW BN CN KR MY PH TH ID VN MM LA KH Ranking deviation Rank 3,02 3 4,11 9 5, ,88 2 4, , ,41 5 3,17 4 3,66 7 2,55 1 3,63 6 4, , , ,75 8 Japan is the only developed country in the region we are studying; it is ranked as No. 3 by total weighted STV. Because we used Japan as one of the benchmarks in the criterion of asymmetric shocks, and it was weighted as 65%; it explains why Japan is ranked as No. 1 in both criteria of supply and demand shocks. Moreover, Japan has the relatively most stable real growth rate among fifteen countries in the period of , although its economy fluctuated several times during the last two decades. Export is the key driving power for the economy of Japan, but Japan is only ranked as NO.13 in the criterion of exports structure. Japan is also ranked lastly in the criteria of openness and insurance; its economy is not highly depended on the intra-regional trade and seems having not enough insurance mechanism. Table is the analysis of ranking deviation. We calculated the standard deviation of all fourteen ranking positions for each country. Higher deviation means the ranking is most diversified, we prefer lower deviation. From this figure we can see that Japan has most diversified ranking although overall it is ranked as NO.3. 93

98 Placed at the forth position, Taiwan has a much more even ranking in each sub-criterion. The wage flexibility of Taiwan is ranked as No.1, and price flexibility as No.4; this indicates the relatively more flexible economy in this country. When economic shocks occur, even if Taiwan gives up its monetary instrument to regional monetary union, it can still adjust to the situation faster and more efficiently than other countries. A good ability on defending regional supply shocks and having no larger percentage of external debt will help Taiwan on this point as well, because in both criteria Taiwan are ranked as a remarkable No.3. Altogether Brunei is ranked at No. 5 position. As one of the richest countries in the world, Brunei has standout ranking in the criteria of insurance mechanism. Ranked as No.2 for regional trade situation Brunei has intense trade relation within South East Asia region. But since the economy of Brunei is highly dependent on the export of petroleum and gas, its economic structure scored rather low as No.14; and this largely impact the stability of Brunei s economy. One reason however that Brunei is ranked high at No.5 is that it has no external debt at all. It could be argued that if having no debt is an absolute advantage then the reason could be the low consumption demand in this country. As the biggest emerging economy of the world, mainland China has been going through a dramatic developing period in the latest two decades; those huge changes drive China to the No. 6 position in our ranking. China has a remarkably stable economic growth and most stable interest rate, the second less external debt as percentage of GDP. However, in the criteria of GDP industrial origin, China is only ranked as No.14, i.e. it still needs to improve the status quo of economy which is highly depending on one kind of industries. Actually, China is on the way to changing its industrial structure, trying to increase the weight of service industry for total GDP. Moreover, the labor mobility in China is the lowest one among the fifteen countries; we can ascribe this to the domestic labor amount in China. 94

99 South Korea is ranked as No.7. Similar to Japan, the total trade situation in Korea also include less weight on regional trade; holding less portfolio investment, concentrated export structure, etc. But Korea is short of stability on macroeconomic point comparing with Japan. Generally speaking, under other sub-criteria, the performance of Korea is not bad; the deviation of all fourteen ranking is ranked at 5. Apart from Malaysia, the total weighted STV for all other countries are below zero. Malaysia is ranked as No.8 with of that value. The economic growth of Malaysia has not been stable during the last several decades, ranked as No.13 under this sub-criterion. The trade situation of Malaysia is noticeable no matter regional trade or total trade, which indicates the international trade of Malaysia can be benefited more by adopting common currency than most of other countries. It has more even ranking among all fourteen sub-criteria than Korea. The Philippines ranks ninth with a total STV of in final ranking. The biggest benefit would come from the production and export structure if the Philippines close to join in the currency area. Both of the sub-criteria in production diversification rank second among samples which implies that the Philippines enjoys a relatively balanced industrial structure. But the costs will be high compared to benefit. The Philippines ranks low in all the cost-related criteria. The most important criterion of cost part is Correlation of Asymmetric Shocks. Philippines ranks only 7th and 10th respectively in demand shock and supply shock correlation which means that the Philippines has a rather different economic cycle comparing with other sample areas. In Insurance Mechanism, the Philippine ranks even lower which means it may not be able to stand against economic shocks. The Openness criterion also shows a roughly that the Philippines is only placed 9th in average total trade as a percentage of GDP. However, the Philippines has a high standard deviation of GDP growth rate which in placed 2nd in our samples implying a smooth development speed. Thailand really got a mixed picture in final ranking. The advantage may come from 95

100 the asymmetric shocks criterion. In supply and demand shocks correlation analysis, Thailand ranks 6th and 8th separately. Total trade as percentage of GDP is also placed high at 5th but, on the other hand trade inside the region is lower, at 12th. The export structure of Thailand is reasonably organized in which it ranks 6 th, implying the optimized industrial structure. Thailand did not do so well in the last criterion regarding Macroeconomic conditions. It ranks 8th and 12th respectively. This means that if Thailand wants to join in the currency area, it should heavily adjust its macro economy. This process definitely needs time and incurs costs. Noticeably, among a total of fourteen sub-rankings, Thailand has the most even distribution, which indicates that the position for Thailand as No.10 is the most reasonable ranking. The most attractive finding for Indonesia is the production and export structure. It even ranks top in export diversification and it ranks 3rd in industrial composition. This criterion indicates that the country may benefit more if it joins in the currency area and the diversified industry will protect the country from being hurt by asymmetric shocks. This turns clearer if we consider the Asymmetric Shocks criterion. Indonesia ranks 6th in asymmetric demand shock correlation and 8th in asymmetric supply shock correlation, but it is weaker in other sub-criteria. Indonesia was hurt deeply from the Asian Financial Crisis, which may partly explain why they do not have so much total foreign assets. Indonesia ranks eleventh in the final ranking. Vietnam has the lowest labor mobility besides China. But wage flexibility ranks high at 4th in the samples. It also gets a relatively stable price level in which it ranks 8th. In production and export structure criterion, Vietnam performances well, coming first in industrial structure and 4th in export diversification. Vietnam also has a high foreign assets level compared to total GDP. This provides insurance for recovering from economic shocks. Vietnam developed fast in recently years especially after 1990s. The average growth rate of real GDP in 2000 to 2005 is up to 7.18% (see Table ) which is just behind China. The economic foundation of Vietnam is still weak however and it takes time to integrate with other members. Moreover, from the 96

101 criterion of Asymmetric Shocks we can see that Vietnam placed lowest in the correlation of both asymmetric supply and demand shocks, both of which are the most important criteria for measuring costs. This strongly implies that Vietnam has a different industrial cycle compared with other members and if it chooses to give up monetary autonomy, the cost of adjusting economic shocks will be much higher. Although Myanmar is ranked as No.13 among the fifteen countries, it still performed remarkably in several sub-criteria, like wage flexibility, having more intense regional trade and stable interest rate. Myanmar is however one of the poorest countries in the world, ranking rather low on insurance mechanism and it has the lowest trade percentage of the whole economy, which is heavily depending on agriculture. Thus Myanmar s real growth rate during last several decades also fluctuated because of a less diversified industrial structure. Lao Republic is ranked as one of the last three countries under nine, of a total fourteen sub-criteria, which leads to its final ranking of second last. For a long period, Lao mainly needs international aids for its domestic economy, and is highly dependent on imports for its domestic consumption, especially depending on regional imports. This explains why Lao is ranked No.1 under the sub-criteria of regional trade but ranked as third last based on the total trade as percentage of GDP. Altogether, Lao does not satisfy most of criteria we chose based on OCA theory. Ranked at the bottom for four sub-criteria, Cambodia is ranked last in the final ranking, with weighted total STV Although it still has relatively intense trade within the region, ranked at No.4, the economy of Cambodia is highly dependent on international aids. As one of the least developed countries in the world, agriculture is the main support for the economy of Cambodia, and it is the most vulnerable country for the economic shocks among the fifteen sample countries. 97

102 5. Conclusion In this study, we are trying to find both qualitatively and quantitatively the feasibility of each country to adopt regional common currency. Our main results are: South East Asia is not short of the necessary basis for monetary integration, because of economic interest, they will overlook those political issues to economically collaborate with each other; secondly, based on our quantitative analysis, currently. Except for Singapore, most of ASEAN member countries are not ready for regional monetary integration, the other five countries are generally satisfied the 7 OCA criteria we chose. Depending on our quantitatively results, there are several ways to consider optimal currency area, because optimum has not got any fixed definitions. Firstly, we think that the countries with similar weighted total STV scores which show their similar status quo in economy, and less deviation of sub-ranking (from Table ), which indicate their rankings are reasonable, could adopt common currency, and realize monetary integration. These countries are Hong Kong, Taiwan, South Korea, Philippines, Thailand, Malaysia and Indonesia. Secondly, we think there could be two groups of optimal currency area. ASEAN countries could go through a similar way as the EU. They can firstly realize monetary integration among a group of ASEAN member countries. In this case, we think that Singapore, which has a distinguished score, is not suited to be one of the forerunners. There are several other countries which could be the forerunners, which we believe are: Philippines, Thailand, Malaysia and Indonesia; Hong Kong, Taiwan and Korea could be another group of optimal currency area countries, since they are ranked in the top seven and have lower sub-ranking deviation. Another alternative for those groups of countries that are feasible for monetary integration is to fix the exchange rate calculated by a basket of currencies each with 98

103 different weight. This can be a cushion for the political divergence in some periods. Whether the optimal weight for each currency is in the basket, is a question which is not the main study of this paper. 6. Shortcomings In this study, we discuss the feasibility of economic integration within ASEAN member countries plus China, Japan, South Korea, Taiwan and Hong Kong, in total 15 countries and areas. Based on OCA theory, we use quantitative methods to compare the qualification of each country to adapt common currency, which is a key point to realize the economic harmony in East Asia. However, our analyzing and calculation are limited by our own knowledge, data availability and comparability etc. which we need to generally mention here. The detail related to each part will be found in the former section of this paper. Firstly, from the beginning of this paper, we tried to answer if there is kind of basis for ASEAN + 5 to realize monetary integration. We concluded that the reason is political, cultural etc. which we believe is very important; but this could be argued by historians. Secondly, we choose seven criteria as a basis of quantitative research based on their fundamentality, but because of the availability problem of data we still abandoned some important sub-criteria which could better indicate the real economic situation of those countries. Moreover, how to weight each sub-criterion is also a tricky question; we consulted some opinions from other scholars, but they do not have consensus on this point, and as Mic- Maro economy is such an extremely complicated system, no certain weight could be allocated. We try to use comparable data, but yearly data are not always available for every 99

104 sample country, sometimes we can only get one year data for specific country or we cannot get data for several countries at all, e.g. the real wage data for Brunei and Lao are unavailable, thus for sub-criteria like wage flexibility, there is no result for these two countries. This could more or less impact the final ranking. Moreover, our data is mainly from the Asia Development Bank (ADB), on line official statistic office of each country and year book of United Nations, etc. Some data are officially estimated ones which could impact the real situation as well. 7. Suggestion for Further Research During the writing of this paper, we also found several interesting questions which can not however be answered in this paper, and we would like to mention them below. (1) The OCA Theory does not have a single model to measure all the criteria related to monetary integration and it points in different directions, so that there may be problem of inconsistency. The convergence process of the EU is also full of surprises and experiments. In a future study, we think that theoretical improvement is strongly needed for OCA Theory, especially its basic framework and superstructure engineering. Of course, empirical evidences from potential integrating currency areas are most valuable materials for academic study in the future. (2) Because of the high developing speed of South East Asia countries nowadays, the final result could change dramatically in few years. It would be interesting to update data we use in this paper to see if there are different results. (3) Maybe it is interesting to discuss how each country can economically or politically improve the score we get here. 100

105 Reference Alberto A, Robert J. B, Silvana T. (2002). Optimal Currency Areas. NBER Working Paper No. W9072. Available at SSRN: Anonymous. (1999). Economic Openness: Growth and Recovery in Asia. Excerpted from the Asia Development Outlook. ADB: EDRC Briefing Notes, Number 9. Anonymous. (1957). Treaty of Rome. signed in Rome which gave birth to the European Economic Community (EEC) and to European Atomic Energy Community (Euratom). Barro, R. J., and Gordon, D.B. (1983). A positive theory of monetary policy in a natural rate model. Journal of Political Economy 91, Barry Eichengreen. (1993). European Monetary Unification. Journal of Economic Literature, Vol. 31, No.3. pp Barry Eichengreen, Tamim Bayoumi. (1996). Is Asia an Optimum Currency Area? Can It Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations. escholarship Repository. University of California, Berkeley: Center for International and Development Economics Research. Bayoumi, T. and Eichengreen, B. (1994). One Currency or Many? Analyzing the Prospects for Monetary Unification in Various Parts of the World. Princeton University, Princeton Studies in International Finance, No. 76, Princeton, New Jersey. Bayoumi, T. and Ecichengreen, B. (1997). Ever closer to heaven? An optimum-currency-area index for European countries. European Economic Review 41 (1997) Bayoumi, T. and Eichengreen, B. (1998). Exchange rate volatility and intervention: implications of the theory of optimum currency areas. Journal of International Economics, 45 (1998) Bayoumi, T., Eichengreen, B. and Mauro, P. (2000). On Regional Monetary Arrangements for ASEAN. Presented at the ADBI/CEPII/KIEP Conference on Exchange Rate Regimes in Emerging Market Economies, Tokyo. Belkacem.L, Imed.L. (2002). Are GCC Countries Ready for Currency Union? Retrieved 19 Sep 2006, from the world wide web: 101

106 Blanchard, O., and Quah, D. (1989). The Dynamic Effects of Aggregate Demand and Supply Disturbances. American Economic Review, 79, pp Branson, W.H. (1986). The Limits of Monetary Coordination as Exchange Rate Policy, Brookings Papers on Economic Activity, Vol. 1986, No. 1, pp Bris, Arturo, Koskinen, Yrjo and Nilsson, Mattias. (2002). The Euro Is Good After All: Corporate Evidence. Yale ICF Working Paper No Yale ICF Working Paper No Available at SSRN: Carlos Alfredo Rodriguez. (2000). On the Degree of Openness of an Open Economy. Universidad del CEMA. Retrieved 23 August 2006, from the world wide web: Corden, W. M. (1972). Monetary Integration. Essays in International Finance. International Finance Section No. 93. Princeton University: Department of Economics, Princeton, New Jersey. Corden, W. M. (1978). Keynes and the Others: Wage and Price Rigidities in Macro-Economic Models. Oxford Economic Papers, New Series, Vol. 30, No. 2., pp Daniels, J. P., Nourzad, F., and VanHoose, D. D. (2005). Openness, centralized wage bargaining, and inflation. European Journal of Political Economy, 22, pp De Gauwe, P. (2003). Economics of Monetary Union. Oxford University Press, Fifth Edition, New York. David Romer. (1993). Openness and Inflation: Theory and Evidence. The Quarterly Journal of Economics. Vol. 108, No.4. PP Eichengreen, B. (1997). On the Links between monetary and political integration. University of California at Berkeley, Unpubilshed manuscript. Eichengreen, B. (2006). Global Imbalances and the Asian Economies: Implications for Regional Cooperation. ADB Working Paper Series on Regional Economic Integration No. 4. Eiji Ogawa, Kentaro K. (2001). Toward an Asian Currency Union. KIEP/NEAEF conference paper. Honolulu, Hawaii. Retrieved 01 Sep 2006, from Frankel, J. A. and Rose, A. K. (1998). The Endogeneity of the Optimum Currency Area Criteria. Economic Journal, Vol. 108,

107 Goto, J. and K. Hamada. (1994). Economic Preconditions for Asian Regional Integratio.. In T. Ito and A. Krueger, eds., Macroeconomic Linkage: Savings, Exchange Rates and Capital Flows. Chicago: University of Chicago press. Fleming, J. M. (1971). On Exchange Rate Unification. Economic Journal, Vol. 81. Ingram, J.C. (1969). Comment: The Currency Area Problem. In Mundell, R.A. and A.K. Swoboda (eds). Monetary Problems of the International Economy Chicago: Chicago University Press. Iversen, T. (1999). The Political Economy of Inflation Bargaining Structure or Central Bank Independence?. Public Choice 99, Junichi Goto. (2002). Economic Preconditions for Monetary Integration. Kobe University, Japan: Research Institute for Economic and Business Administration. Kenen, P. B. (1969). The Theory of Optimum Currency Areas: An Eclectic View. pp in Mundell, R. A. and Swoboda, A. K. Kyophilavong, P. (2004). Analyzing the effect of AFTA on Lao economy, Macroeconomic model approach. prepared for the ESRI Asia Workshop on Economic Modeling on Deeping Interrelationships among Asian Countries, held on November 30, 2004 in Bangkok, Thailand. Mongelli, F. P. (2002). New Views on the Optimum Currency Area Theory: What is EMU telling US?. European Central Bank Preliminary Draft, Working Paper Series No.138. McKinnon, R. I. (1963). Optimum Currency Areas. The American Economic Review 53 (4): Mundell, R. A. (1961). A Theory of Optimum Currency Areas. The American Economic Review, 51 (4): Mundell, R. A. (1973). Uncommon Arguments for Common Currencies. In Harry G. Johnson and Alexander K. Swoboda, editors, The Economics of Common Currencies. Harward University Press, Cambridge, pp Naoyoshi Kinukawa. (2005). On Chiang Mai Initiative. Pusan, Korea, 7th Trilateral Financial Cooperation Seminar. Norbert Walter. (2004). Creat a Common Asian Currency by Retrieved 03 Sep 2006, from 103

108 Pradumna B, Rana. (2002). Monetary and Financial Cooperation in East Asia: The Chiang Mai Initiative and Beyond. ADB: ERD Working Paper Series No.6. Economics and Research Department. Prasai, B.S. (1993). Intra-Asian Labor Migration: Redefining the Implications. Asian Survey, Vol. 33, No. 11, PP Roberto F. De Ocampo. (2004). A Single Currency for Asia: Is It Time? Jeju Island, Korea: 37th ADB Annual Meeting. Robson, P. (1987). The Economics of Monetary Integration. Allen and Unwin, London. Rose, K.A. and Engel, C. (2003). Empirical exchange rate models. Journal of International Economics. Vol 60, Issue 1, 2003, pp.1-2. Shujie Yao, Zongyi, Zhang. (2003). Openness and Economic Performance: A Comparative Study of China and the Asian NIEs. Journal of Chinese Economic and Business Studies, Vol, No. 1, pp Tavlas, G. S. (1994). The Theory of Monetary Integration. Open Economies Review, Vol. 5, No. 2, pp Tower, E. and Willet, T. D. (1976). The Theory of Optimum Currency Areas and Exchange Rate Flexibility. Special Papers in International Economics 11. ZhangBin. (2004). Monetary cooporation in East Asia: Between Dream and Reality. Worldwide Information Issue Seven, In Chinese. Zhaoyong Zhang, Kiyotaka Sato, Michael McAleer. (2003). Asian Monetary Integration: A Structural VAR Approach. CIRJE Discussion Papers. available from Zhang Jikang, Lan Yin. (2005). Is East Asia suitable for a Monetary Union? experience from EU and evidence from China, Japan and South Korea. 9th OCT 2006, Retrieved from World Wide Wed: ency%20union% _revised.pdf 104

109 Appendix List Abbreviations of Sample Countries and Areas Name A ii Tables for Labor Mobility: Table A-2 Migrant Stock: International Migrants as a Percentage of Total Population iii Table A-3 Growth Rate of the Migrant Stock Percentage iii Tables for Wage and Price Felicity: Table A-4: Real Private Consumption, Percentage Change From Previous Year iv Table A-5: Unemployment Rate as Percentage of the Total Population iv Table A-6: Consumer Price Index, Annual Change % v Table A-7: Growth rate of Real GDP v Tables for Asymmetric Shocks: Table A-8 Correlation Coefficient Analysis about Real Private Consumption and Unemployment Rate for Sample Regions, vi Table A-9 Correlations of Aggregate Supply Shocks...ix Table A-10 Correlations of Aggregate Demand Shocks. ix Tables for Openness of Economy: Table A-11 Gross Domestic Product in Million USD..x Table A-12 Exports of Goods and Services, in Million USD.....x Table A-13 Imports of Goods and Services, in Million USD... xi Table A-14 Intra-regional Exports, in Million USD...xi Table A-15 Intra-regional Imports, in Million USD.. xii Tables for Industrial and Exports Structure: Table A-16 GDP by Industrial Origin of Each Country..xiii Table A-17 Exports by Principal Commodities...xvi Tables for Insurance Machenism: Table A-18 External Debt as Percentage of GNI...xix Table A-19 International Reserves in Million USD...xix Table A-20 Foreign Assets in xx Tables for Macroeconomic conditions: Table A-21 Long-term Interest Rate , Separated by 5-year Sub-group...xx Table A-22 Long-term Interest Rate... xxi Table A-23 Real GDP, Continued from Previous Table, from xxi Map of South East Asia xxii i

110 Table A-1: Abbreviations of Countries and Areas Names Country/Area Abbreviation Country/Area Abbreviation P.R.China CN Japan JP South Korea KR Taiwan TW Hong Kong HK Brunei BN Cambodia KH Indonesia ID Lao PDR LA Malaysia MY Myanmar MM Philippines PH Singapore SG Thailand TH Viet Nam VN ii

111 Table A-2 Migrant Stock: International Migrants as a Percentage of Total Population P.R.China Japan South korea Taiwan n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. HongKong Brunei D Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Source: UN Population Division Source of Taiwan from Monthly Bulletin of Labor Statistics 116 table 11-4 Table A-3 Growth Rate of the Migrant Stock Percentage P.R.China Japan South Korea Hong Kong Brunei D Cambodia Indonesia Lao,PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Source: UN population division iii

112 Table A-4: Real Private Consumption, Percentage Change From Previous Year China -1,41-2,54-2,87-1,98-3,20-1,71 3,53 2,79-1,17 0,68 1,70 0,03-1,63-1,46-3,56 3,91-16,67 Japan 3,80 4,10 1,30-0,70-4,20 2,10 0,75 1,70-0,70-0,10 1,40 0,68 2,40-2,70 3,40-1,30 0,80 Korea 3,80-0,41-0,18 0,93 0,48 1,55-0,04 0,73 0,02-6,75 5,25 3,95 2,28 0,89-3,57-4,08 2,20 Taiwan 5,48 2,48-0,02 2,06 0,78 3,04 0,50 0,59 0,13 0,42 1,47 1,62 2,42-1,28-0,59 0,77 1,41 Hong Kong -1,78 3,25 3,15-0,34-0,68 2,23 4,03-0,97-0,49 0,82-1,95-2,48 2,38-2,82-0,51 1,89-2,02 Cambodia -5,21 2,05-17,88 10,96 23,21-6,25 0,86 1,90-7,33 4,45-6,54-2,69-3,58-3,16-0,19 n.a. n.a. Indonesia -6,89 5,50-1,14-3,95 4,63 2,00 3,18 1,27-1,09 9,89 9,09-16,62 0,12 7,11 1,94 0,00-2,97 Malaysia 1,64 3,60 0,72-3,65-3,95-0,31-0,45-3,95-1,49-8,35 0,04 1,86 6,37-2,19-0,97-1,74 1,81 Myanmar 2,64-3,18-2,65 1,37 1,64-0,38-1,84 2,20-0,37 0,05-1,43 0,76 0,95 1,44-0,82 n.a. n.a. Philippines 0,34 1,50 3,12 2,70 0,95-2,34-0,36-0,85-1,14 2,33-2,27-4,12 1,45-1,74 0,30-0,45 1,23 Singapore -1,21-1,74-2,87 0,12 0,46-1,40-5,21-1,52-1,41-2,53 5,45 0,18 8,85 1,34-1,29-5,29-3,72 Thailiand -2,18 1,91-2,79-0,38-0,18-1,28-1,48 1,15 1,64-0,93 3,35 0,29 2,08-0,09-0,16-0,79 0,40 Vietnam n.a. n.a. -3,47-1,64-5,69-1,61-1,41 1,13-3,59-1,23-3,16-3,19-2,41 0,37 1,79-1,78-2,22 Source: website of ADB, Key Indicator 2006 Table A-5: Unemployment Rate as Percentage of the Total Population P.R.China Japan South korea Taiwan HongKong Brunei D n.a. n.a. n.a Cambodia n.a. n.a. n.a. n.a. n.a. n.a n.a. n.a n.a. Indonesia Lao, PDR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. Malaysia Myanmar n.a. The Philippines Singapore Thailand Viet Nam n.a. n.a. n.a. n.a. n.a. n.a. n.a Source: Website of ADB, Key Indictor 2006 iv

113 Table A-6: Consumer Price Index, Annual Change % AVERAGE China 18,81 17,97 3,12 3,39 6,38 14,69 24,09 17,09 8,29 2,81-0,80-1,41 0,39 0,69-0,81 1,21 3,90 1,80 6,76 Japan 0,70 2,30 3,00 3,00 1,90 0,90 0,90 0,00 0,00 1,90 0,90-0,90 0,00-0,90-0,90 0,00 2,30-0,30 0,82 Korea 7,06 5,65 8,56 9,36 6,31 4,80 6,20 4,44 4,98 4,40 7,54 0,82 2,25 4,10 2,70 3,60 3,60 2,70 4,95 Taiwan 1,28 4,42 4,12 3,62 4,47 2,94 4,10 3,67 3,08 0,89 1,69 0,17 1,26-0,01-0,20-0,28 1,62 2,30 2,17 HongKong 7,80 10,29 10,19 11,29 9,58 8,74 8,87 9,01 6,27 5,90 2,83-3,96-3,76-1,58-3,12-2,54-0,40 0,91 4,24 Brunei 1,19 1,31 2,13 2,00 1,28 4,28 2,42 6,01 1,97 1,68-0,41-0,08 1,25 0,58-2,29-16,10 0,90 1,09 0,51 Cambodia n.a. n.a. 141,76 165,06 96,08 114,34-0,47 7,80 7,14 7,96 14,78 4,03-0,79 0,23 3,30 1,15 3,80 5,80 37,74 Indonesia 8,04 6,41 7,50 9,33 7,56 9,67 8,48 9,47 7,90 6,20 58,47 20,30 9,30 12,50 10,00 5,10 6,10 10,50 11,82 Lao n.a. 59,76 35,88 13,27 9,84 6,25 6,77 19,63 13,03 20,00 95,79 139,74 n.a. 12,31 12,99 16,86 11,90 7,20 30,08 Malaysia 2,62 2,85 3,07 4,39 4,61 3,63 3,13 4,00 3,38 2,82 5,16 2,82 1,52 1,40 1,78 1,16 1,39 3,06 2,93 Myanmar 16,87 27,18 17,63 32,27 21,91 31,83 24,10 25,20 16,28 n.a. 30,10 20,98-0,06 40,11 43,47 25,87 1,66 11,00 22,73 Philippines 12,58 12,09 12,42 17,73 7,90 5,61 8,34 6,71 7,51 5,59 9,27 5,95 3,95 6,80 3,00 3,45 5,98 7,63 7,92 Singapore 1,50 2,40 3,40 3,41 2,30 2,31 3,10 1,70 1,40 2,01-0,31 0,00 1,25 1,03-0,41 0,51 1,73 0,50 1,55 Thailand 3,80 5,36 5,91 5,73 4,22 3,32 5,03 5,73 5,92 5,59 8,11 0,21 1,66 1,60 0,70 1,80 2,70 4,50 3,99 Vietnam n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 5,72 3,18 7,82 4,24-1,55-0,35 4,00 4,26 7,75 8,40 4,35 Source: Website of ADB, Key Indictor 2006 Table A-7: Growth rate of Real GDP China 16,90 19,40 5,74 2,72 7,98 2,69 6,94-1,56 5,56 10,21 7,29 Japan 12,50 10,70 4,70 8,41 8,03-1,23 3,09 3,97 4,39 5,27 5,48 Korea 14,10 8,30 8,57 4,88 12,34 7,39 6,53 11,20 10,01 9,01 7,06 Taiwan 8,90 11,40 12,80 13,30 12,90 1,40 4,90 14,00 10,30 13,70 8,40 Hong Kong 12,00 9,50 7,08 10,33 12,36 2,33 0,33 16,23 11,73 8,50 11,52 Brunei 0,24 11,08 8,00 8,00 8,00 8,00 0,36 20,16 10,91 6,80 22,54 Cambodia na na -5,00-5,44-18,94-5,23-1,35 0,00-14,68 0,00-12,83 Indonesia 7,50 8,20 7,01 9,41 11,31 7,64 4,98 6,88 8,77 7,85 6,25 Laos na na 3,92 3,93-1,15 1,67 0,49-5,71-1,38-6,14 5,98 Malaysia 4,90 6,00 22,93 9,39 11,70 8,32 0,80 11,56 7,75 6,65 9,35 Myanmar 3,30 5,00 4,25 2,26-1,33 4,88 4,09 5,51 5,24 6,22 4,71 Philippines 4,70 3,80 5,43 5,45 8,92 3,56 5,57 8,81 5,60 5,17 5,64 Singapore 13,60 13,70 12,54 13,34 11,25 6,76 3,96 7,18 7,76 8,59 9,31 Thailand 6,60 11,40 4,96 4,07 9,86 4,35 4,85 9,38 9,90 10,44 5,31 Vietnam na na -10,47-9,58 1,19 5,81 4,38 6,33 1,98 2,91-1,89 v

114 Continued China 5,96 5,75 9,57 10,85 15,23 12,59 8,55 11,18 10,67 4,12 Japan 2,82 2,93 2,76 1,61 3,12 5,08 2,96 3,79 6,76 5,29 Korea -2,09 6,47 7,25 10,70 8,25 3,94 10,62 11,10 10,64 6,74 Taiwan 7,40 6,20 3,50 8,30 10,70 5,00 11,50 12,70 8,00 8,50 Hong Kong 10,12 9,19 2,75 5,69 9,97 0,43 10,77 12,96 7,97 2,56 Brunei -7,00-19,83 3,95 0,50 0,60-1,49-2,71 2,00 1,10-1,07 Cambodia -5,85 0,89-3,70-3,84-2,47-4,09-5,28-1,29 16,19-0,26 Indonesia 9,88 7,93 2,24 8,78 6,97 2,46 5,88 4,93 5,78 9,08 Laos 1,70 12,43 3,97-0,02 11,43 5,06 4,85-1,07-1,84 13,41 Malaysia 7,44 6,94 5,97 6,22 7,76-1,08 1,10 5,39 8,80 9,18 Myanmar 7,91 6,30 5,42 4,35 4,93 2,85-1,06-4,01-11,35 3,70 Philippines 5,15 3,42 3,62 1,87-7,32-7,31 3,42 4,31 6,75 6,21 Singapore 9,69 9,61 6,86 8,19 8,31-1,64 2,30 9,73 11,63 9,62 Thailand 4,78 5,91 5,35 5,58 5,75 4,65 5,53 9,52 13,29 12,19 Vietnam -4,81 4,05 8,73 6,25 8,41 6,20 2,92 3,97 5,15 4,69 Source: Website of UNSTATS, of Taiwan is from Taiwan statistical data book 2004 Data of Taiwan is from Taiwan statistical data book 2004 Data of 1969,1970 is from International Financial Statistics Browser Table A-8 Correlation Coefficient Analysis about Real Private Consumption and Unemployment Rate for Sample Regions, correlation China_UR China_RW China_UR Pearson Correlation Sig. (2-tailed).352 N China_RW Pearson Correlation Sig. (2-tailed).352 N vi

115 Correlations Correlations Japan_UR Japan_RW Japan_UR Japan_RW Pearson Correlation Sig. (2-tailed).335 N Pearson Correlation Sig. (2-tailed).335 N HongKong_UR HongKong_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N HongKong_UR HongKong_RW Correlations Correlations Korea_UR Korea_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Korea_UR Korea_RW Cambodia_UR bodia_rw Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Cambodia_UR Cambodia_RW Correlations Correlations Taiwan_UR Taiwan_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Taiwan_UR Taiwan_RW Indonesia_UR Indonesia_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Indonesia_UR Indonesia_RW vii

116 Correlations Correlations Malaysia_UR Malaysia_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Malaysia_UR Malaysia_RW Singapore_UR Singapore_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Singapore_UR Singapore_RW Correlations Correlations Myanmar_UR Myanmar_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Myanmar_UR Myanmar_RW Thailand_UR Thailand_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Thailand_UR Thailand_RW Correlations Correlations Philippine_UR Philippines_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Philippine_UR Philippines_RW Vietnam_UR Vietnam_RW Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Vietnam_UR Vietnam_RW viii

117 Table A-9 Correlations of Aggeregate Supply Shocks Japan 60% Korea 25% Hong Kong 15% AVERAGE China Japan Korea Taiwan Hong Kong Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Source: Bayoumi and Eichengreen 1994 Data of China, Brunei, Cambodia, Laos, Myanmar and Vietnam are estimated from authors. Table A-10 Correlations of Aggregate Demand Shocks Japan 60% Korea 25% Hong Kong 15% AVERAGE China Japan Korea Taiwan Hong Kong Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Source: Bayoumi and Eichengreen 1994 Data of China, Brunei, Cambodia, Laos, Myanmar, Vietnam ix

118 Table A-11 Gross Domestic Product in million USD (current prices) Country average P.R.China 1,175, ,270, ,416, ,649, ,843, ,471,100.0 Japan 4,165, ,978, ,299, ,668, ,799, ,382,304.0 South korea 481, , , , , ,523.6 Taiwan 279, , , , , ,470.0 HONG KONG 162, , , , , ,386.0 Brunei Darussalam 4, , , , , ,936.4 Cambodia 3, , , , , ,202.6 Indonesia 164, , , , , ,080.0 Lao, PDR 1, , , , , ,148.0 Malaysia 88, , , , , ,545.4 Myanmar 7, , , , , ,828.2 The Philippines 70, , , , , ,320.0 Singapore 85, , , , , ,920.0 Thailand 115, , , , , ,672.6 Viet Nam 32, , , , , ,626.0 Source:IMF World Economic Outlook and EconStats Table A-12 Exports of goods and services, in Million USD Country average Average P.R.China Japan South korea Taiwan HONG KONG Brunei Cambodia n.a Indonesia Lao, PDR n.a n.a Malaysia n.a Myanmar n.a The Philippines n.a Singapore n.a Thailand Viet Nam n.a n.a Source:International Financial Statistics -- yearbook 2006 data for Brunei we get by our own caculation based on exports of merchandise x

119 Table A-13 Imports of goods and services, in Million USD Country average P.R.China Japan South korea Taiwan HONG KONG Brunei Darussalam Cambodia Indonesia Lao, PDR Malaysia Myanmar The Philippines Singapore Thailand Viet Nam Source:International Financial Statistics -- yearbook 2006 data for Brunei we get by our own caculation based on imports of merchandise Table A-14 Intra-regional Exports, in million USD Area average P.R.China Japan South korea Taiwan HongKong Brunei D Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Source: international monetary fund- direction of trade statistics the data of taiwan we caculate based on its 2005 year book data of Lao for 2005 is estimated one based on the average increasing rate xi

120 Table A-15 Intra-regional Imports, in million USD Area average P.R.China Japan South korea Taiwan HongKong Brunei D Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Source: international monetary fund- direction of trade statistics the data of taiwan we caculate based on its 2005 year book data of Lao for 2005 is estimated one based on the average increasing rate xii

121 Source: ADB Table A-16 GDP by industrial origin of each country, in domestic currency China Japan % % GDP by industrial origin g Agriculture d Mining 0.2 Manufacturing e Electricity, gas, and water 2.6 Construction Trade Transport and communications Finance 6.8 Public administration 9.5 Others f Notes: we can only get one year percentage of GDP by industrial origin for Japan Korea GDP by industrial origin g Agriculture d Mining Manufacturing e Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Others f Taiwan GDP by industrial origin Agriculture Mining Manufacturing Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Othersa Hongkong GDP by industrial origin Agriculture Mining Manufacturing Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Others Brunei D GDP by industrial origin Agriculture n.a Mining n.a Manufacturing Electricity, gas, and water n.a Construction n.a Trade n.a Transport and communications n.a Finance n.a Public administration n.a n.a n.a n.a n.a Others n.a xiii

122 Cambodia GDP by industrial origin n.a Agriculture n.a Mining n.a Manufacturing n.a Electricity, gas, and water n.a Construction n.a Trade n.a Transport and communications n.a Finance n.a Public administration n.a Others n.a Indonesia GDP by industrial origin Agriculture Mining Manufacturing Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Others Lao GDP by industrial origin Agriculture Mining Manufacturing Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Others Malaysia GDP by industrial origin Agriculture Mining Manufacturing Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Others Myanmar GDP by industrial origin n.a 2005 n.a Agriculture n.a n.a Mining n.a n.a Manufacturing n.a n.a Electricity, gas, and water n.a n.a Construction n.a n.a Trade n.a n.a Transport and communications n.a n.a Finance n.a n.a Public administration n.a n.a Others n.a n.a Philippine GDP by industrial origin Agriculture Mining Manufacturing Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Others xiv

123 Singapore GDP by industrial origin Agriculture Mining Manufacturing Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Others Thailand GDP by industrial origin Agriculture Mining Manufacturing Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Others Viet Nam GDP by industrial origin Agriculture Mining Manufacturing Electricity, gas, and water Construction Trade Transport and communications Finance Public administration Others xv

124 Table A-17 Exports by principal commodities, in million USD if not mentioned. Source: 2003 international trade statistics yearbook volume 1, trade by country Exports of China food and live animals chiefly for food 12777, , ,0 beverages and tobacco 873,0 984,0 1019,0 crude materials, inedible, except fuels 4172,0 4402,0 5032,0 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 8405,0 8435, ,0 111,0 98,0 115,0 chemicals and related products, nes 13352, , ,0 manufactured goods classified chiefly 43813, , ,0 machinery and transport equipment 94901, , ,0 miscellaneous manufactured articles 87110, , ,0 commodities and transactions not classified elsewhere in the SITC 584,0 648,0 956,0 Exports of Japan food and live animals chiefly for food beverages and tobacco crude materials, inedible, except fuels 3348, ,6 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes chemicals and related products, nes 29662, , ,5 manufactured goods classified chiefly 42589, , machinery and transport equipment , ,9 miscellaneous manufactured articles 36225, , ,9 commodities and transactions not classified elsewhere in the SITC , ,5 Exports of Korea food and live animals chiefly for food 2204,3 2114,2 2163,9 beverages and tobacco 0,0 0,0 0,0 crude materials, inedible, except fuels 1578,1 1627,6 1992,0 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 8037,6 6580,9 6938,5 0,0 0,0 0,0 chemicals and related products, nes 12302, , ,1 manufactured goods classified chiefly 27484, , ,0 machinery and transport equipment 86388, , ,8 miscellaneous manufactured articles 11013, , ,4 commodities and transactions not classified elsewhere in the SITC 1106,9 1030,2 2110,8 Exports of Hong Kong food and live animals chiefly for food 2304,1 2146,4 1979,6 beverages and tobacco crude materials, inedible, except fuels 2154, ,7 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes chemicals and related products, nes , ,2 manufactured goods classified chiefly , machinery and transport equipment , ,8 miscellaneous manufactured articles 71670, commodities and transactions not classified elsewhere in the SITC 1286,4 2076,2 5190,8 xvi

125 Exports of Taiwan in Tan new currency food and live animals chiefly for food 65400, , ,0 beverages and tobacco 0,0 0,0 0,0 crude materials, inedible, except fuels 26920, , ,0 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 64300, , ,0 1100,0 1200,0 1600,0 chemicals and related products, nes , , ,0 manufactured goods classified chiefly , , ,0 machinery and transport equipment , , ,0 miscellaneous manufactured articles , , ,0 commodities and transactions not classified elsewhere in the SITC , , ,0 Exports of Indonesia food and live animals chiefly for food 3252,3 3604,5 3663,7 beverages and tobacco 0,0 0,0 0,0 crude materials, inedible, except fuels 4187,7 4522,0 5316,4 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 14274, , ,7 1446,2 2656,3 3013,7 chemicals and related products, nes 2803,5 2936,9 3347,1 manufactured goods classified chiefly 11272, , ,8 machinery and transport equipment 9079,3 9766,9 9753,9 miscellaneous manufactured articles 9271,1 8171,6 8462,9 commodities and transactions not classified elsewhere in the SITC 438,2 326,2 312,8 Exports of Brunei food and live animals chiefly for food beverages and tobacco crude materials, inedible, except fuels mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 3134,5 3138,9 3633, chemicals and related products, nes manufactured goods classified chiefly 65,7 38,8 50,5 machinery and transport equipment 140,2 164,4 221,4 miscellaneous manufactured articles ,7 225,2 commodities and transactions not classified elsewhere in the SITC Cambodia estimated percentage Exports of Lao food and live animals chiefly for food ,50 beverages and tobacco 15,3 9,77 10,92 0,00 crude materials, inedible, except fuels 80,19 77,8 69,95 1,00 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 4,89 39,04 46,5 0, ,00 chemicals and related products, nes ,00 manufactured goods classified chiefly ,67 99,6 97,00 machinery and transport equipment 91,31 92,69 97,36 0,50 miscellaneous manufactured articles 16,87 19,89 11,44 0,00 commodities and transactions not classified elsewhere in the SITC 11,31 15,88 16,84 0,00 xvii

126 Exports of Malaysia food and live animals chiefly for food 1733,8 1965,8 2219,9 beverages and tobacco 0,0 0,0 0,0 crude materials, inedible, except fuels 1984,2 2209,7 2666,1 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 8557,2 8070, ,4 3242,9 4717,2 6387,4 chemicals and related products, nes 3725,9 4340,0 5343,7 manufactured goods classified chiefly 6403,5 6575,1 7418,1 machinery and transport equipment 53332, , ,6 miscellaneous manufactured articles 7736,4 8044,0 8865,2 commodities and transactions not classified elsewhere in the SITC 944,9 1161,4 1435,6 Exports of Philippines food and live animals chiefly for food 1301,9 1380,1 1518,9 beverages and tobacco 0,0 0,0 0,0 crude materials, inedible, except fuels 404,3 334,8 458,8 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 272,5 380,2 565,1 431,9 376,4 535,3 chemicals and related products, nes 326,8 352,7 395,9 manufactured goods classified chiefly 1262,0 1009,7 1272,5 machinery and transport equipment 23870, , ,7 miscellaneous manufactured articles 4149,5 2401,5 4124,2 commodities and transactions not classified elsewhere in the SITC 77, ,1 140,6 Exports of Mayanmar Food and live animals Beverage and tobacco Crude materials excluding fuels Mineral fuels etc Animal, vegetable oil and fats Chemicals 11, Basic manufactures Machines, transport equipment 18, Miscellaneous manufactured goods 103, Unclassified goods 1954, Exports of Singapore food and live animals chiefly for food 1546,6 1621,2 1638,2 beverages and tobacco 1024,6 996,6 848,7 crude materials, inedible, except fuels 877,7 833,5 852,2 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 9243,3 9765, , chemicals and related products, nes 9734, ,7 manufactured goods classified chiefly 4757,5 4947,9 5397,7 machinery and transport equipment 78425, , ,3 miscellaneous manufactured articles 10711, , commodities and transactions not classified elsewhere in the SITC 5242,4 5088,4 5697,8 xviii

127 Exports of Thailand food and live animals chiefly for food 9711,9 n.a 10932,1 beverages and tobacco 0,0 n.a 0,0 crude materials, inedible, except fuels 2390,6 n.a 4163,6 mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 1813,6 n.a 2134,5 0,0 n.a 0,0 chemicals and related products, nes 3723,1 n.a 5191,3 manufactured goods classified chiefly 7716,2 n.a 9462,3 machinery and transport equipment 27334,0 n.a 35190,1 miscellaneous manufactured articles 9829,2 n.a 10636,8 commodities and transactions not classified elsewhere in the SITC 2315,1 n.a 2255,6 Exports of Viet Nam food and live animals chiefly for food 4021,1 4094,1 n.a beverages and tobacco 0 0 n.a crude materials, inedible, except fuels 409,5 513,4 n.a mineral fuels, lubricants and related materials animal and vegetable oils, fats and waxes 3442,4 3547,6 n.a 0 0 n.a chemicals and related products, nes 217,8 254 n.a manufactured goods classified chiefly 984,4 1114,5 n.a machinery and transport equipment 1388, n.a miscellaneous manufactured articles 4375,5 5658,1 n.a commodities and transactions not classified elsewhere in the SITC 113,5 113,5 n.a Table A-18 External Debt as percentage of GNI Table A-19 International Reserves in million USD Area P.R.China Japan n.a n.a South korea Taiwan HONG KONG Brunei Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Singapore n.a Thailand Viet Nam Area P.R.China Japan South korea Taiwan HONG KONG n.a Brunei n.a Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Source: ADB Source: ADB xix

128 Table A-20 Foreign Assets in 2005 in million USD Table A-21 Long-term Interest Rate Area Inward FDI Portfolio Investment Assets P.R.China Japan South korea Taiwan HONG KONG Brunei n.a Cambodia Indonesia Lao, PDR n.a Malaysia Myanmar Philippines Singapore Thailand Viet Nam n.a most of data are from IFS International Financial Statistics data of philippines,malaysia,myanmar,korea are estimated based on the data of before 2005 data of taiwan from center bank of China,taibei China 6,22 6,36 5,09 Japan 2,83 0,27 0,07 Korea 9,32 9,96 5,42 Taiwan 8,05 5,74 2,72 Hong Kong 5,83 6,22 1,92 Brunei n.a. 2,78 1,17 Cambodia n.a. 10,24 7,70 Indonesia 17,00 19,16 13,06 Lao 4,20 7,86 11,38 Malaysia 7,10 6,10 4,20 Myanmar 1,40 3,90 3,90 Philippines 14,33 11,58 8,96 Singapore 3,94 3,16 1,38 Thailand 9,94 6,80 2,78 Vietnam 3,08 2,36 1,67 Source: Website of ADB, Data of Japan is from Website, Bank of Japan data of vietname FDI from state General statistics office xx

129 Table A-22: Long-term Interest Rate China n.a. Japan n.a Korea Taiwan Hong Kong Brunei n.a. n.a. n.a. n.a. n.a. n.a Cambodia n.a. n.a. n.a. n.a. n.a. n.a Indonesia Lao Malaysia Myanmar n.a. n.a. n.a. n.a. n.a. n.a. n.a. Philippines Singapore Thailand Vietnam n.a. Source: Website of ADB, Data of Japan is from Website, Bank of Japan Table A-23 Real GDP, Continued from Previous Table, from P.R.China Japan South korea Taiwan HongKong Brunei D Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Source: from UN Statistics Division, Data of Taiwan is from Taiwan Statistical Data Book 2006 xxi

130 Figure Map of South East Asia xxii