Column: A common Caricom currency?

(TTG 01/07/2006) Port of Spain - Much interest in the Caricom surrounds the concept of a single currency. This is a natural extension of the CSME conversation, although itself not a new idea, the notion having been around for some decades now with a genesis that can be traced even as far back as the Federation.

Notwithstanding the impediments presented by a rise in terrorism as the current wave of globalisation continues, the role of Caricom and the CSME can be expected to rise.

And so one can predict the increase in interest in the idea of a single currency with the benefits and drawbacks of a Caribbean Monetary Union (CMU) being hotly debated.

While the debate has not become the primary topic on the regional agenda, it certainly has come to the fore of late; it seems a good time to be thinking about whether such a union makes sense.

Currency union member nations tend to experience less volatility in exchange rates, more trade, and more synchronised business cycles. Although these are good things, or at the least, not bad things, the directionality of causation is certainly unclear, given that highly integrated economies tend to form currency unions in the first place. So, from this perspective, the case for CMU remains unclear.

The case for CMU

Economists in the region have been lining up to say that CMU is a sound idea, and with good reason. Significant and growing intra-regional trade flows have been observed in the last two decades, with intra-regional imports more than doubled in the period 1990-2000.

A currency union lowers exchange costs for regional businesses and regional and international tourists alike, saving everyone money (except the commercial banks, which must necessarily make a transaction profit).

The CMU would reduce the foreign reserve requirement, since intra-regional trade would no longer require foreign exchange, speed integration of capital markets and encourage cross listings on our various exchanges until a regional exchange emerges.

It also encourages the further development of a regional labour market with multidirectional labour movement, perhaps increasing the ability of the region to keep its best and brightest within its expanded borders.

However, most advocates neglect to mention that Caricom nations have very real differences.

The 13 Caricom member countries vary by physical size, population, economic structure and per capita income.

Tourism is dominant for most, although mineral deposits in Jamaica, T&T and Guyana are significant.

Recognising this, the region’s Central Bankers came up with the inelegant sounding but sensible 3-12-36-15 rule. That is, for CMU to happen, countries would have to show Maastricht-type criteria for economic convergence which are 3 months of import cover, national exchange rates versus the US dollar to be stable for 36 months, and the external debt ratio must be held at less than 15 per cent of exports.

The EU used this kind of logic with some success. However, since that time, the stability and growth pact has been breached more than once, and now economists are finding that economies are structured differently, are growing at different rates, and that the brunt of the changeover impact is being borne by business and the consumer.

This should not have come as a surprise but the experience has in fact been that more firms underestimated the costs of changeover to the Euro than not.

As it is firms which compete, not nations, these costs and effects must be estimated and managed extremely carefully because national competitiveness is determined by firms, and not by direct government activity.

Thus, it is not that I would not recommend the CMU as some have quoted me as saying, but that I would recommend extremely conservative business preparation and estimates of cost.

Notwithstanding this, anything which helps our firms compete more cheaply is desirable, and with intra-regional trade becoming even more critical to the competitiveness of regional firms, the argument for a single currency can be made.

The rise of China, India and Brazil cannot be ignored, and even the US leverages on the power of scale—it does after all, enjoy the benefits of a currency union.

The real CMU issue

To my mind the real issue has nothing to do with the arguments of economists. Economic arguments can be made either way, and certainly the value of intra-regional trade is a compelling factor. Clearly as the world rushes to meet our markets, we need to think of the regional economy as a domestic economy.

However, the central question is in a sense, not about any of this. It is about whether the Caribbean ever could have such a currency, not whether it should.

Caricom member nations thinking about CMU must recognise that we cannot have an effective currency union without ceding some measure of sovereign control. Even the EU has not finished wrestling with this thorny issue although the US has, albeit through political union.

In my view, for monetary union to work, some measure of political integration has to come onto the radar.

This is a huge challenge, for in the current reality it is hard for me to imagine which central banker would sit at the head of the regional central bank, how regional monetary policy would gel with the fiscal policies of individual states, which Prime Minister would want to cede that kind of control to a regional body, and so on.

I have been considerably misquoted on this point. To clarify, I am not advocating political union. I am merely stating that it is unrealistic to suggest we can have a currency union without there being some impact on the political sovereignty of individual member nations. I further stated that it is difficult for me to see how this would happen in the current context.

To be more specific, in a large respect the issues are human.

Singapore and Taiwan do quite well without monetary union, and they work in highly integrated economic environments as well. But assuming that the Caribbean decides to go the way of the CMU, it is the personalities of our leaders which will have to be taken into account.

For the idea of CMU to work, we need ambitious and visionary leadership, a supranational method to translate regional directives into domestic ones, strong institutions to develop, promote and facilitate rules and procedures, independent sources of revenue for the central mechanism, identification of complementarity touchpoints to sell the idea of economic benefit, variable geometry for joining the CMU and political legitimacy.

Even if we achieve all the others, as long as the emperor style of leadership prevails in the Caribbean, it is unlikely that we will get far along the CMU path.

By Dr Rolph Balgobin is executive director, Arthur Lok Jack Graduate School of Business.