Comment
Which
currency system is best?
April 27, 2001
|
This is an unfinished argument, and given our modest stature, we would not claim to be putting in the final word on this subject. We have some practical thoughts to share though from observing what is happening in the world today, and specifically the imminent crisis facing Argentina. Currency systems range between two extremes, from inflexible pegging to freely floating. The ongoing argument is about which one is superior, and supporters of freely floating systems inevitably point out their superior track record. At this juncture, it looks like Argentina could be the first currency board to fail. Perhaps there are others in the past, but they probably exist in the mist of history and are therefore irrelevant. If Argentina ended up defaulting on its debt and devaluing its currency. What happen? In practical terms, Hong Kong currency board would be impacted negatively, but her system would survive. However going forward, the conventional wisdom will shift towards the free floating currency camp, as the better system. Would that be better? A currency system must be practical. By that, we mean it must serve the economy, providing maximum support for creating wealth in a sustainable way. So, which currency regime is better could be determined in a bottom up fashion. It must be custom made, and must be easy for investors to understand and use advantageously. In a simple economy, where most of the business people are unfamiliar with currency hedging and management, a floating currency would inhibit rather than promote growth. Therefore they are better off developing some understanding and sophistication in their financial markets first. In an advanced economy like the US, where it is cheaper to raise money via the markets than through institutional lenders, a floating currency is an inescapable consequence for optimal financial asset allocation in an open economy. Many countries economic and financial market development lies somewhere between the developing third world and the advanced US. So they have to live with intermediate, can-do systems at the moment. Their system must evolve with their changing needs and development. Argentina is being forced to make the transition not in the best of circumstances. Malaysia seemed to hold their peg as a stick in the mud. The risk is yesterday's brilliant and unorthodox solution could become tomorrow number one problem. Singapore may have to re-examine its policy in the light of restructuring and developing new paradigms of economic growth. But as a small country with persistent security needs and a narrow band for maneuver, this is not easy. It will take time and is likely to lag what the market needs. In view of the bewildering pace of change, policy makers exposed to the strange and unfamiliar run the risk of taking too long to be sure of what is right for Singapore. In sum, each economy cognizant of its strength and limitations must pick a system along the spectrum of an immovable peg to complete freedom with creative modifications to match local conditions. But even as they do so, each has to appreciate that the fastest way to progress economically is to participate in global integration. With this in mind, they could make adjustments to their existing system as their economy develops. Had the Asian nations been alert and not complacent from their drunkenness of easy money and growth, the currency crisis of 1997/8 could have been avoided. We have not learned from history repeated lessons that the most dangerous time occurs at the safest moment. Therefore,
do not swing to the other extreme of freely floating currency only to
inherit an unnecessary set of problems. Countries should be clear minded
about their capabilities and aspirations, and then adopt custom solutions
that are sensitive to local conditions. |
Return To
|
