Is the Time Right for an Australasian Common Currency?
by: Christopher T. Hnanguie

I read with interest the recent initiative of the Somare government's newly established Parliamentary Select Committee on Pacific Economic Community. The TOR of the Committee outlined by its chairman, Ian Ling-Stuckey last Friday noted among others that the Committee would report to Parliament on the Formation of a Pacific Economic Community involving Papua New Guinea, Pacific Island Countries, Australia and New Zealand, and the Adoption of a currency to be shared with other South Pacific nations.

This is indeed a significant milestone in the country's external involvement and should be approached with care. A thorough cost-benefit analysis maybe warranted before we expand further resources. Whilst I have a lot of confidence in the calibre of the membership of the committee in the likes of Dr. Bob Danaya, Malcolm Smith, Peter Ipatas, Dr Banare Bun, Arthur Somare, David Anggo, John Hickey, and Mr. Ling-Stuckey himself, let me throw in a few quick remarks off the cuff.

When 56% Swedes rejected the Swedish government's proposal to join the eurozone in a referendum, the British, who are still out of the eurozone, said, "Sweden is Sweden and Britain is Britain and we have a very different economy......., (so) our national economic interests would be the determining factor" in the decision to join (or not) the eurozone. Just because a majority of the Swedes rejected the euro is no reason why Britain must reject it too, the British lamented.

Similarly, just because Europe has a common currency is no reason why other regions must have it too unless their economic interests converge enough to necessitate a common currency as a means to the end of economic growth and development rather than as an end in itself that a common currency is made out to be since the launch of the euro.

It is, therefore, important to take a brief overview of the situation that led up to euro and then compare and contrast it with the economic compulsions in the Pacific or Australasian context that may require innovative home-grown solutions.

A period of monetary instability followed the demise of the gold standard in 1914. This was also the beginning of monetary nationalism when the US Fed chose to sterilize gold inflows in contrast with the era of the gold standard when domestic economies were adjusted instead to maintain external accounts' equilibria. Consequently, competitive devaluations became common in the absence of exchange rates' coordination in the interwar period.

After the end of the Second World War, the Bretton Woods System (BWS) was devised to restore monetary stability. As the BWS failed to restore exchange rate stability, the dollar was delinked from gold in August 1971 and was subsequently devalued. Japan and key Western European countries floated their currencies that marked the end of the BWS of exchange rate management. Western Europe would now seek monetary stability on its own.

The efforts made by the European Community (EC) in this direction included the European "snake" of 1972 and the European Monetary System (EMS) of 1978. As the EMS succeeded in reducing exchange rate variability by 1989, the resolve towards currency stability through closer economic and monetary coordination and a common currency strengthened.

Consequently Maastricht Treaty was agreed upon in December 1991 and took effect in November 1993 after ratification by member states. While common currency would help achieve stability, it would also be a means to the end of smooth operations of the European Common Market through the elimination of competitive devaluations and high transactions costs involved in the conversion of currencies.

As Europe sought currency stability, it was also integrating economically at a pace rapid enough to necessitate a single European currency as a medium of easy exchange in a region where goods, services, money, and capital were all beginning to flow freely across national boundaries.

By the time the Maastricht Treaty took effect, Western Europe had traversed a long distance since the formation of the European Coal and Steel Community, the European Atomic Energy Community, and the European Economic Community (EEC) in the 1950s. By early 1990s, Western Europe was poised to move surely towards the European Monetary Union (EMU) with a common central bank (ECB) and currency by the turn of the century.

Why did it take over half a decade for the Europeans to have a monetary union in place? Because, despite the agreement in 1991, the national economies had yet to converge before they could be influenced similarly by a common monetary policy. Britain still remains out of the eurozone as, inter alia, its economic cycle has yet to match that on the continent otherwise its economy would be affected differently by the interest rate movements steered by the ECB.

Within Britain, people and interest groups remain for and against euro depending upon the manner in which their economic interests would be affected by joining the eurozone. For economies to converge, strict eligibility convergence criteria were set for those countries who wished to join the eurozone.

These criteria included targets for price stability, budget deficit, long-term interest rates, exchange-rate stability, and public debt. A stability and growth pact remains in place whose implications will be reviewed later as not everything is hunky dory for the eurozone countries either.

Nonetheless, the above overview clearly shows that Western Europe's march towards a monetary union and a single currency was backed by a vision the European leaders had for their region. Regional economic integration and monetary stability were means or intermediate goals at best towards the broader end of their countries' economic strength.

As for the Pacific Island Countries, economic integration remains a far cry as even the reasons behind economic integration remain unclear in a milieu characterized by extreme deprivation and poverty whose elimination should be the overarching goal for national governments.

The Pacific Island Countries score poorly on poverty with most having about 85% of their population living below $2 per day. Their human development indices also remain unimpressive meaning to say that most of the Pacific Island Countries have yet to achieve intra-country integration of their societies characterized by stark dualism. The Pacific Island Countries have to achieve national economic integration first and foremost without which they will continue to piggyback.

Are regional economic integration and intra-country economic integration mutually exclusive? Regional economic integration can promote trade, growth, and human welfare if countries are at comparable levels of development, which is not the case here as Australia and New Zealand industry is far more competitive cost-wise, as well as quality-wise than the Pacific Island Countries.

As integration will shift production to low-cost producers in the region, industries in the Pacific Island Countries will experience a greater challenge in the wake of an already liberalizing international trade regime. This is not to say that Pacific Island Countries' industries should not learn to grow out of protection and become competitive internationally.

While a planned approach is required for the purpose that is currently absent, promotion of trade would help only if redistributive mechanisms are in place that would allow the fruits of growth to be shared equitably in each participating country. Even if the industries of the Pacific Island Countries were developed and competitive enough, in the absence of redistributive mechanisms, trade and growth would help the industry and traders more than it would help the common people.

This is why, even in Britain, it is the big business and big trade unions that are more pro-euro than their smaller counterparts are. And, the majority in Sweden voted against joining the eurozone primarily because they wished to guard their socio-economic well-being.

So, is the well-being of the people in eurozone countries not guarded enough? A stability and growth pact guides policy formulation in the eurozone. Its price stability and budget deficit requirements tend to impose a tight policy environment that inhibits growth and increases unemployment.

Except for the Netherlands, Luxembourg, Ireland, and Portugal, the unemployment rates of eurozone countries remain way above that of the USA. So, even though the trade balance may remain favourable for most members, the unemployment situation remains precarious reflecting adversely on the human welfare aspects of the actively trading eurozone countries.

Consequently, tension remains between the two major eurozone members, namely, France and Germany with the former remaining more concerned with employment and the latter remaining concerned with inflation and the strength of the euro.

Although the eurozone countries do not experience dualism, they have yet to determine how to include all of their populations in regional trade promotion. While inclusion remains a challenge even for a developed Western Europe, this challenge is much more pronounced in the underdeveloped countries of the Pacific most of whom have attempted to develop through random measures with market reform being one of them. Deregulation, privatization, and liberalization are a donor-driven agenda in the Pacific without any vision. The results in the form of poverty, deprivation, and human costs are known to all.

If the buzzword during the 1990s was market reform, the buzzword in the first decade of this century might well be a common currency without really investigating the implications or the reasons thereof.

While I have all the confidence in the abilities of our elected leaders to successfully pursue the initiative, it must be kept in mind that a common currency and the razing of borderless trade might sound meaningless against the backdrop of the racist barrier being erected by Australia, the people ought to ensure that slogans of the kind of common currency do not serve to divert policy attention away from the real issues of poverty and deprivation that necessitate national solutions first and foremost! The ideas of open borders and single currency proposed by the Committee are not unrealistic, but a difficult path to tread and demand hard work, firm resolve and sincerity. The idea has to go a long way to materialize. It took a long time for the European Union to agree for the Euro and it is not so easy to do and will take time. An atmosphere of trust in the Pacific could only be created with a sense of respect among all members despite their size or degree of advancement. Before reaching such an agreement, the European countries had resolved to endure mutual respect to ensure cooperation at all levels.


Christopher Taylor Hnanguie is a Macroeconomist with the Asian Development Bank and has been the architect behind ADB's Greater Mekong Subregional Economic Cooperation Strategy
chnanguie@adb.org

Hi CH,

Thanks for posting this article here. It's hard to say this without appearing to be flattering, but I'll try. I had read an article about yourself and Clement Waine in the Newspaper last year (2003). Malcolm Nalum (if I recall correctly) writes pieces on Papua New Guineans that are successes in their field and I managed to catch those two articles with people I had 'seen' on PNGscape. Perhaps you could give some pointers to some of us, who would like to follow the path you guys have travelled.

Concerning your article, I had some observations and questions:

Firstly, wasn't there some fuss made a few years back about a single currency for New Zealand and Australia? What came of that? At least that seemed feasible, but a common regional currency in the pacific, at this point in time seems almost absurd, unless of course we surrender our sovereignity to Australia and let it dictate our economic policies for us, i.e. unless we become another State of Australia.

unless their economic interests converge enough to necessitate a common currency as a means to the end of economic growth and development rather than as an end in itself

Isn't this unlikely though, knowing that our economy is primarily Agricultural and mining, which means we are at the mercy of the world markets more than Australia which has a more diverse economy?

Wouldn't a common currency also mean that our agriculture exports, if we were to export to countries other than Australia, become uncompetitive if the Australia dollar (which would most likely be the common currency) strengthened?

And the main point is that the European situation necessitated the development of the Euro, whereas in our case, we are just suggesting we do it and hoping that it has some positive effects (Not completely true I know but that's what it seems like).

through the elimination of competitive devaluations and high transactions costs involved in the conversion of currencies

Forgive my ignorance of our intervention in the currency markets, but do we actually engage in competitive devaluations? I thought our currency was freely floating, and besides do we really have the resources to influence what level our currency is at? George Soros (for example) would have more of an influence than we would I'd think.

strict eligibility convergence criteria were set for those countries who wished to join the eurozone

This would no doubt be set by Australia, as the granddaddy in the Pacific, so we would have to convert our die basically.

redistributive mechanisms are in place that would allow the fruits of growth to be shared equitably in each participating country.

I always read about these redistributive mechanisms that would make free trade equitable, but I don't think I've actually seen it in practice. Has this actually happened? Is it the norm? and would it be likely in our case?

I'm not for or against a common currency, anything that would help our nation, I am for, but anyone who advocates a common currency for the region must show how it would benefit the ordinary Papua New Guinean, whose wellbeing is the ultimate purpose of Government.

I'm sure the time is right for something like this.