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Message from ADB's President Contributors Acknowledgements Executive Summary and Recommendations Jeffrey D. Sachs, Masahiro Kawai, Jong-Wha Lee, and Wing Thye Woo Paper Summaries (full papers downloadable) International Monetary Advisory Group Global Financial Crisis, its Impact on India and the Policy Response Nirupam Bajpai To What Extent Should Capital Flows be Regulated? Maria Socorro Gochoco-Bautista The Case for a Further Global Coordinated Fiscal Stimulus Willem Buiter Managing a Multiple Reserve Currency World Barry Eichengreen From the Chiang Mai Initiative to an Asian Monetary Fund Masahiro Kawai An Asian Currency Unit for Asian Monetary Integration Masahiro Kawai The International Monetary System at a Crossroad Felipe Larrain B. Towards a New Global Reserve System Joseph Stiglitz A Realistic Vision of Asian Economic Integration Wing Thye Woo An Asian Monetary Unit? Charles Wyplosz Will US fiscal Deficits Undermine the Role of the Dollar as Global Reserve Currency? If So, Should US Fiscal Policy be geared to Preserving the International Role of the Dollar? Yongding Yu International Monetary Working Group International Reserves and Swap Lines: the Recent Experience Joshua Aizenman, Donghyun Park and Yothin Jinjarak The Future of the Global Reserve System Daniel Gros, Cinzia Alcidi, Anton Brender, and Florence Pisani Renminbi Policy and the Global Currency System Yiping Huang Will the Renminbi Emerge as an International Reserve Currency? Jong-Wha Lee Asia's Sovereign Wealth Funds and Reform of the Global Reserve System Donghyun Park and Andrew Rozanov Reforming International Monetary System Kanhaiya Singh Designing a Regional Surveillance Mechanism for East Asia: Lessons from IMF Surveillance Shinji Takagi

9. A Realistic Vision of Asian Economic Integration

Wing Thye Woo

In thinking about Asian economic integration, it is noteworthy that most attempts at regional economic integration have been failures. Beside the European Union (EU), the only other case that has been meaningful enough and durable enough is the North American Free Trade Area (NAFTA). Unlike the EU, NAFTA allows only limited labor mobility across countries; has no plans to coordinate exchange rate policies; and does not envisage an eventual political union.

Our conclusion is that the feasible architecture for an Asian Economic Union would be a free trade and open investment area that has a regional financial facility. For the medium run, an Asian Financial Facility (AFF) would operationally be a large Asian swap facility that has its own surveillance mechanism to pre-qualify members for emergency loans. The primary mission of AFF is to reduce the cost of bad luck and not the cost of bad policies. AFF would evolve according to the progress of reforming the IMF, and to the needs created by an increasingly integrated Asia. Given the large size of East Asian foreign reserves, the AFF should take on the additional task of designing a pooling scheme where part of the East Asian reserves could be safely used to finance sound infrastructure projects in the poorest Asian countries. It is important that the AFF does not suffer from the institutional inertia that is characteristic of the present global organizations like the Security Council of the United Nations, the World Bank and the International Monetary Fund. The leadership structure of the AFF should be designed to avoid simply locking in the balance of economic power that existed at the time of its founding.

Given the great disparity in the present and future distribution of economic power in East Asia, and the greater restrictions on labor mobility within the (commonly proposed) Asian Economic Union, a NAFTA-type of Asian Economic Union would be preferable to an EU-type of Asian Economic Union. Exchange rate coordination might occur sporadically but it is unlikely to be the norm in the medium term, and most possibly even in the long term. East Asia should therefore be focusing its energy on creating as wide a free trade area as possible (i.e. be geographically unrestricted), and forgo the unrealistic goal of a common Asian currency. However, if an Asian common currency is still adopted, then the lesson from the Greek crisis in early 2010 is that it is necessary for the Asian Financial Facility to become the Asian Monetary Fund.