The Prospects East Asia regional economic integration : opimum-currency-area theory

Abstract

This thesis was inspired by the remarkable growth stimulated by not only globalbut also regional agenda. Moreover, there is a rapidly growing web of regionalinteraction and there are currently repeated urges for regional cooperation and avariety of propositions for comprehensive and institutionalized regionalorganization. The first wave of regionalism launched with the founding of theEuropean Community in 1957 and now they have become the most successful regionalgrouping-European Union. Meanwhile, other continents have also formed their ownbloc. The objectives behind this thesis - the possibility for East Asia to form theirown trading bloc and the direction of their cooperation. Analyzing the theory of Optimum Currency Area, various factors such asinflation, the difference in GDP growth rate, economic dissimilarities, tradelinkages, sizes of economies and exchange rate were employed. The result shows thatprior the financial and economic crisis; China, Korea, Malaysia, the Philippines,Singapore, Taiwan, and Thailand can be candidates for participating in the currencyunion vis-a-vis Japanese Yen. However, due to the crises, every country except Chinashows no sign of convergence towards the exchange rate stability. This is mainlybecause the crises occurred in the financial sector, which have strong effect to thevolatility of exchange rate. But presently, with most Asian countries on the path ofrecovery, the topic of regionalism should be a priority due to the fact that thecrises highlighted the weakness of, and the need for improvement to, theinternational financial system. According to the study of Trade interdependency through the export and importmatrix, the result suggests that the overall picture of the intra-regional trade inAsia have been strong in trade relations. which is a good sign for a solidfoundation of the integration. Base upon the finding, the share of Japaneseintra-trade in the region has been increasing solidly, and this trend, which is setto continue, makes her a prominent candidate to anchor the regional integrationmovement, in the same way that Germany was the leading member of the European Union. The study concludes that if the currency block is to be realized in East Asia,the first suitable stage to begin with should be the Free Trade Area and then move todeeper integration, which might take number of years. Hence, the concentration shouldbe placed on the formation of institutional arrangement, such as an Asian CentralBank. Such an institution would ensure that the potential members will act on commoninterests and goals and hence speed up the integration processes. In addition,countries should cooperate sincerely in order to achieve the final objectives of anAsian regional integration. Harmonized fiscal and monetary policy is preferred inorder to solve the problem and limitations in this region. This will lead to theopportunity in the formation of economic and monetary integration. The miracle inthis region will happen again with the stronger economic foundation.