Monetary Politics in Southeast Asia: External Imbalances in Regional Context

Abstract

Rather than conforming to a single model of export-driven growth, countries across the Asia-Pacific vary in terms of their external imbalances and the domestic politics of monetary policy that underlie them. This article argues that while there is evidence of what can be called monetary mercantilism – a deliberate policy of currency management to retain export competitiveness – in some countries, others exhibit a very different pattern of monetary politics. Domestic political change may be bringing Southeast Asia's more democratic countries closer to the consumption-driven model of developed economies such as Australia and New Zealand. Conversely, despite much higher per capita national incomes, less rebalancing has occurred in traditionally export-driven countries. Rather than being symptomatic of strategic success, the accumulation of external assets by surplus countries is costly and risky. Their mercantilist strategies have perverse domestic and international implications, including the continuation of privileges enjoyed by the USA as the issuer of the world's international currency. Although they face long-term incentives to change strategies, surplus countries face domestic distributional pressures that perpetuate the status quo.

Keywords:

• monetary politics
• Southeast Asia
• exchange rates
• foreign reserves

Notes on contributor

Natasha Hamilton-Hart is Associate Professor in the Department of Management and International Business, University of Auckland.

Notes

1. Seminal studies include Robison (1986), Yoshihara (1988) and Hewison (1989). See Abrami and Doner (2008) for a review of contributions.

2. Even studies of central banking in Southeast Asia say little about exchange rate regimes or the socioeconomic bases of exchange rate policy. See, for example, Maxfield (1997). Recent studies of China provide valuable contributions that address this neglect of the domestic monetary politics of exchange rate policy in contemporary East Asian contexts. See Hung (2009), Vermeiren (2013) and Steinberg and Shih (2012).

3. On the precautionary and status-related impulses behind reserve accumulation, see Cheung and Qian 2009.

4. See, for example, Jeanne (2007). Xing and Wan (2006) also provide evidence of exchange rate-related competition. See IEO (2012) for a critical reflection on the debate on reserve accumulation.

5. Cheung et al. (2010) provide a nuanced review and analysis, in contrast to heated accusations of undervaluation made in the context of US policy debates, such as Bergsten (2010).

6. In fact, in the years leading up to the AFC international capital markets viewed developing countries such as Malaysia and Thailand – then running current account deficits – with at least as much forgiveness, as these countries experienced extraordinarily high capital inflows despite large current account deficits. See, for example, Jomo (2003).

7. On the institutionalisation of the commitment to price stability in New Zealand and Australia see, for example, Walsh (1995); Quiggin (1998).

8. The high costs and perversities of an over-zealous commitment to fighting inflation have been prominently brought to the fore by critics of austerity policies in several developed countries in the wake of the global financial crisis of 2008. For example, Krugman (2013). Blyth (2013) discusses the lineages of such thinking. Before this, the distributional biases associated with low inflation were forcefully demonstrated by Jonathan Kirshner. See Kirshner (2001) on the econometric evidence that moderate levels of inflation – beyond the 0–3 per cent bands typically pursued by independent monetary authorities – do not have any adverse growth effects. On the distributional biases of different monetary policy settings, see Kirshner (1998, 2001, 2003) and Frieden (1991).

9. The most influential studies on the political economy of the region focus on trade regulation, finance, industrial policy and resource rents. See, in particular, Haggard et al. (1993), MacIntyre (1994), Khan and Jomo (2000), Nesadurai (2003) and Rodan et al. (2006).

10. Lim (1999): 110–13 provides a brief analysis of the political importance of property values in Singapore.

11. Based on figures of domestic banking units’ lending to building and construction firms and individual housing loans. The broad property exposure of the local banks peaked at 51 per cent at the end of 2010. Figures available from the Monetary Authority of Singapore, http://www.mas.gov.sg.

12. Mortgage lending rates for private property purchases have been at nominal rates of between 1 and 2 per cent for most of the time since 2008. Given that the consumer price index calculated by Singapore's Department of Statistics increased by 13 per cent between 2009 and end 2012, these nominal rates are negative in real terms.

13. While the local press in Malaysia has made much of the nominal appreciation of the ringgit since 2005, some reports acknowledge that since the formal peg to the US dollar was ended in 2005, the real effective exchange rate (after adjusting for inflation) had appreciated less than 3 per cent (The Star 2010).

14. The Malaysian American Electronics Industry (MAEI) announced that exports by its members dropped to RM 51.8 billion in 2010, from RM 70 billion in 2009, ‘due to the production shift by personal computer makers here to other countries’ (Tan 2011b).

15. Opinion writers representing this set of interests in the local English language press have consistently championed the cause of a stronger ringgit. See, for example, Jagdev (2007); Singh Sidhu (2009); The Star (2011a); Tan (2011a).

16. During 2011 and 2012, the New Zealand press carried numerous stories of complaints about the costs associated with the high dollar by adversely affected industries. In early 2013, the governor of New Zealand's central bank described the dollar as ‘significantly overvalued’ but ruled out any ‘quick fix’ to address the situation (Reuters 2013).