Asia - by which I mean east and south Asia - contains 55 per cent of the world's population, its most dynamic economies, its fastest-growing trade, its highest savings rates, most of its biggest current account surpluses and its largest stocks of foreign currency reserves. It now needs to accelerate regional trade and monetary co-operation.
...... is already a highly integrated region. But some of the current plans for sub-regional preferential trading arrangements endanger its efficient integration of production. What is needed instead is a single free trade arrangement covering the entire region. This should then become the basis for a global move to free trade among market-oriented economies.
Now turn to money and finance. Today, Asian governments are exporting astonishing quantities of capital, overwhelmingly to the US. This is not just absurd. It is also economically destabilising.
......It makes no sense for a region with huge current account surpluses and foreign currency reserves to be so desperate to avoid international financial crises. The US should feel vulnerable instead. A step towards reducing the region's perceived vulnerability would be to create a large Asian Monetary Fund. Armed with this insurance, Asian countries could allow their exchange rates to appreciate, generate greater internal demand and then run current account deficits. This would generate global balance of payments adjustment. Moreover, if Asians do wish to lend money generously, why not benefit their own people rather than Americans?
Preliminary steps have been taken, notably through the Chiang Mai initiative, agreed in May 2000, which created bilateral swap arrangements worth $40bn. But the aim should be to create a fund with at least 10 times as much money, which would still absorb only a fifth of the region's currency reserves. Such an institution would need to undertake forthright surveillance of the members' economies. Initially at least, this job could be subcontracted to the International Monetary Fund.
......If the Asian region is to absorb more of its own savings internally, it also needs to develop efficient capital markets. But the immediate priority is to halt the inordinate foreign currency reserve accumulation. The lead has to come from China, whose exchange rate against the dollar has been completely fixed. Once the renminbi appreciates, most of the other currencies in the region can, and should, follow. The next step could be the choice of a common basket peg among the most internationally integrated economies.
A cessation of its open-ended lending would be good for Asia itself. It would also be good for the US. While the huge current account deficits are helping the US avoid a choice between guns and butter today, they will ultimately generate a dollar crisis. Correction of these deficits, through Asian currency adjustment and greater reliance on internal Asian demand, would help - indeed force - the US to put its macroeconomic house into order. A de facto Asian secession from the IMF would also teach Europeans an invaluable lesson in humility.
Asia should dare to take a big leap forward in trade, monetary and financial co-operation. Americans and Europeans may not like the results. They will have to live with them.
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