Currency Union and East Asia

Abstract

This paper examines the feasibility of the proposal to establish a currency union in the East Asia. In this paper East Asia is composed of ASEAN countries like Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Viet Nam, plus three countries – Japan, China and South Korea. The test for feasibility, the study used Mundell’s concept of factor mobility, Kenen’s trade openness and McKinnon’s product diversification. Results indicate that within East Asian countries, intra labor mobility is immobile. Labor would rather move to European Union 6 countries and United States than stay within the region. Intra capital mobility, on the other hand, is slightly mobile. The average East Asian share of foreign direct investment to gross fixed capital formation is relatively higher compared to developed counties like United States, Germany and France. In terms of trade openness, the volume of trade is relatively higher within the region than the volume of trade in European Union 6 countries and United States. However, it is less symmetric. This means, some countries exports within the region but imports outside the region. Furthermore, there has been increasing diversification of trade within the region. There is even a rise of the share of parts and components in manufacturing. Hence, base on the given results, East Asia is not yet ready to form a currency union.

DOI: 10.5901/mjss.2015.v6n2p415