An Era of Multiple International Currencies?

M. Shahidul Islamshahid1
Research Associate, ISAS

The United States Dollar (USD) remains the supreme global currency performing three key functions of an international currency- a unit of account, a medium of exchange and a store of value. Somali pirates want ransom money to be paid (by parachute) in USD. Even trade between two communist or socialist countries is being conducted in USD. The greenbacks account for 85% of all foreign exchange transactions (as two currencies are involved in each transaction, total currencies share amounts to 200 per cent, instead of 100 per cent). Moreover, it remains the most important currency for invoicing and settling international transactions. Almost half of the global stock of international debt securities is denominated in USD. There are two more currencies – the Euro and the Japanese Yen- that plays a similar role of USD, albeit to a lesser extent.

While no single currency is currently in a position to challenge the role of USD, the greenbacks might lose their preeminent position in global trade and finance owing to a number of factors. Given the way the world economy is being restructured – with the United States losing its prominence and some of the large emerging markets gaining. Nevertheless, this is not the only reason that could lead to the declining role of the USD. Who predicted even a few years ago (before the recent financial crisis) that a non-convertible currency such as the Renminbi (RMB, China’s currency) would draw so much global attention? The reason is the fact that the ongoing debt and other economic malaise in America and Europe do not bode well for their currencies.  This has accelerated the ascendance of the RMB much earlier than one could have anticipated even a couple of years back. Owing to a number of internal and external factors Beijing has taken several key steps to internationalise its currency.

The rise of emerging market currencies led by RMB could be the single most important phenomenon in global finance in this decade. In the past decade there have been a number of unprecedented developments as far as emerging market currencies are concerned. First, the currencies of most emerging markets have been remarkably stable in the past decade. Many observers call this a ‘paradigm shift’ for emerging markets that earlier saw their currencies losing value vis-à-vis the USD and other major currencies. Second, as observed by UBS, the currencies of emerging markets have substantially outperformed the USD, including interest payments on deposits, since 2001. Third, most emerging markets have independent central banks with explicit inflation targets. Fourth, the rising share of emerging markets in global GDP and their strong economic fundamentals have increased the expectation of currency appreciation in these economies.

Additionally, technology is also facilitating room for multiple international currencies. As Barry Eichengreen of the University of California, Berkeley, notes ‘that not so long ago, there may have been room in the world for only one true international currency. Given the difficulty of comparing prices in different currencies, it made sense for exporters, importers and bond issuers all to quote their prices and invoice their transactions in dollars, if only to avoid confusing their customers. Now, however, nearly everyone carries hand-held devices that can be used to compare prices in different currencies in real time.’  

Some argue that the elimination of capital controls has removed the USD’s unique status as the principal medium of exchange in retail markets. Tourists no longer need to have USD travellers’ cheques as credit cards invoiced in other currencies (Brazilian Lira, for instance) are universally accepted.

To sum-up, the potential long term economic decline of US, Japan and Europe, the spectacular rise of the emerging economies, rapid advancement of technology, financial sector reforms around the world might dawn an era for multiple reserve currencies. China may, possibly, lead the way facilitating room for other key emerging market currencies in the not-too-distant future.

The new multiple currency reserve system will be, in all probability, built on four currencies – the US dollar, the euro, the Japanese yen, and the Chinese Renminbi. Among these, the Chinese currency is the only one that is not fully convertible, which it has to be in order to be used as a reserve currency. This, however, could take time. The Chinese have a strong preference for moving with great care when it comes to adopting major changes in the way they manage their economy. They call it ‘crossing the river by feeling the rocks’.

We welcome all comments and feedback at isasblog@nus.edu.sg.

South Asia’s Demographic Window

M. Shahidul Islamshahid1
Research Associate, ISAS

It is widely recognised that the ‘East Asian miracle’ occurred partly because of the region’s favourable demographic changes. The growth in working age population in East Asia was much faster than the growth in its dependant population during the period 1965-1990. As the world’s most dynamic economic region led by Japan ages with higher median age and higher old-age dependency ratio, focus is now shifting to South Asia, which is projected to accumulate a large pool of young population until 2070.

The latest demographic data produced by the United Nation’s Population Program shows that while Japan sees half of its population approaching 44.7 years and older, Afghanistan with a median age of 16.6 is one of the youngest countries in Asia. The corresponding figures for India, Bangladesh, Pakistan, Nepal and Sri Lanka are 25.1, 24.2, 21.7, 21.4 and 30.7 respectively. Indeed, according to this benchmark, South Asia (24.6) is much younger than East Asia (35.5).

While relatively low median age population is an advantage for South Asia, the criterion that matters most is dependency ratio – non-working to working age population. The total dependency ratio declines when a country witnesses a rising share of the working age population. A nation’s demographic window generally opens when the dependency ratio goes below 50.

Afghanistan and Japan, for instance, are Asia’s two youngest and eldest countries respectively. However, both countries have one thing in common: high dependency ratios – child dependency (91) in the case of the former and old-age dependency (35) in the case of the latter.

In South Asia, Sri Lanka is currently enjoying its demographic advantage. The island nation’s demographic window opened in mid-1990s and it is the first country in the region that could experience aging problem as early as 2025.

Of other South Asian countries, India and Bangladesh’s demographic windows are projected to open in 2015.             Both nations could reap demographic dividend until 2055 provided a large part of their population transforms into human capital. Owing to a relatively higher child dependency ratio Pakistan and Nepal’s demographic windows are not likely to open before 2020.

The ongoing demographic transition and the consequent demographic window offer an once-in-a-lifetime opportunity for a number of South Asian countries, particularly India and Bangladesh, to catch-up with East Asian forerunners. The favourable demographic changes are already benefiting the economies of India and Bangladesh. More people in the working age group and a lower dependency ratio mean higher savings and investable surplus, leading to higher economic growth.

India and Bangladesh’s savings boom could sustain few decades. However, their long run growth will depend on, among others, how quickly they reform their respective economies. That could help translating their high savings into much needed investment.

How much dividend they can reap from their respective demographic changes will depend on how best they are able to exploit the window developing human capital.

As far as human capital formation is concerned Sri Lanka is ahead in the region. The data on average year of total schooling (population aged 15), a narrow yet close proxy of human capital, shows that Sri Lanka (8.4) ranks top followed by Bangladesh (5.8), Pakistan (5.6), India (5.1), Afghanistan (4.3) and Nepal (4.0). The corresponding figures for the advanced economies vary 10 to 12. Nevertheless, in the region India has done better in providing advanced skills to large number of its population that has been instrumental in developing its modern sectors such as information and communication technology, pharmaceuticals, healthcare and R&D (also known as ‘new economy’).

The region, bar Sri Lanka, has long way to go to eradicate illiteracy. The proportions of population (15 years old and above) with no schooling in Bangladesh, India, Nepal and Pakistan are over 30 per cent. The corresponding figure for China is 6.4.

That said, South Asia’s progress towards human capital formation is relatively slower if one compares the region with East Asia when the latter was at a similar stage of demographic transition. South Korea’s average year of total schooling (population aged 15 and above), for instance, reached almost advanced country level (8.3) even before the opening of its demographic window in 1980.

Demographic window generally lasts for 30-40 years depending on the country. As the current decade marks the opening of demographic window for a number of key South Asian countries it is high time for the region to invest heavily in its human capital to reap the dividend from their favourable demographic changes. Failing to do so could result in demographic disaster.

We welcome all comments and feedback at isasblog@nus.edu.sg

Social Business: A Window of Opportunity for Bangladesh?

M. Shahidul Islamshahid1
Research Associate, ISAS

Bangladesh is one of the few developing countries that has made significant strides as far as social sector development is concerned. One key reason for this success is that where the state or market failed in delivering the basic needs to the excluded, numerous NGOs and social activists have intervened with various social safety nets.

While Bangladesh’s success in social development has widely been emulated in many parts of the world, the country stands to benefit in many ways by banking on the ideas that are emanating from its social sector. Muhammad Yunus’ vision of social business, for instance, that has its origin in microcredit, is increasingly attracting global attention. One of the basic principles of social business is that investors and owners can gradually recoup the money invested, but cannot take any dividend beyond that point.

Corporate conglomerates that are often subject to criticism for their profit maximising behaviours generally seek refuge in corporate social responsibility or charity to confront their critics. Such rather ad hoc and lump-sum donations might help the poor to some extent but they are less potent than the sustained and lasting impact of social businesses on poverty or other social needs. Corporate houses have found that social business is a new avenue to spend their money and share their technology and expertise in more meaningful ways.

Academics and universities around the world see social business as a niche area to conduct research. Social media (facebook, twitter etc) is quick way to spread the concept from Dhaka to Durban.

Nevertheless, the idea of social business is no more limited to thinking. Several companies based on these ideas have been launched in Bangladesh. Some leading global brands have been working with Grameen to develop some essential products such as yogurt, mosquito nets, shoes and clothes at an affordable price.

French-based food conglomerate Danone’s and Grameen’s joint social enterprise is already recognised as a successful social business model. In her new book on ‘Design Revolution: 100 Products That Empower People’, Emily Pilloton identified Grameen-Danone’s first product Shoktidoi, a yogurt designed to nourish Bangladeshi children at an affordable price, as one of the 25 products that might change the world.

The design of Shoktidoi brings to mind of the invention of Oral Rehydration Therapy (ORT), a simple treatment for diarrhoea. ORT, a mixture of sodium and glucose, invented in a public health research lab (ICDDR,B) in Bangladesh in the late 1960s saved 50 million lives around the world, according to the World Health Organisation. If one trusts the calculations of the leading economist Paul Romer, the dollars-and-cents value of this simple invention is a few times higher than Singapore’s GDP!

Like ORT, Shoktidoi may not be a non-rival goods as the cost of providing it to an additional individual is greater than zero. However, economists may agree that it is a quasi- non rival good given its far-reaching impacts to address the malnourishment problem at minimal cost. The economic and social cost of malnutrition is simply staggering. A study conducted by the UNICEF shows that an estimated 200 million children under five years in developing countries suffer from stunted growth due to lack of adequate food. It is appropriate that this year’s theme of the Social Business Day, to be observed in Bangladesh on 28 June, is Achieving the Millennium Development Goals through Social Business.

The Grameen-Danone initiative is just one example of the immense possibilities of social business. Similarly, thinking out of the (shoe) box, the Grameen-Adidas social venture aims to minimise the barefooted-ness problem by producing shoes that cost no more than one euro. The list goes on.

That said, while the global brands around the world are seeking Professor Yunus’s advice on how to develop successful social business models, this opportunity can also be capitalised to do something bigger.

Bangladesh draws minuscule amount of Foreign Direct Investment (FDI). This costs the country in many ways. FDI flows bridge finance gap, generate employment and narrow the technology gap, inter alia. The interest generated by social business can be an important channel to narrow all these gaps to a large extent. Moreover, the potential innovation in various projects is likely to generate huge positive externalities, greatly benefiting the society.

The government of Bangladesh should play a facilitator’s role by easing the cost of doing business, removing legal barriers, protecting intellectual property rights and offering other incentives to draw the global brands. Social business zones can also be instituted to support the MNCs and local entrepreneurs.

To sum-up, while Professor Yunus, dozens of leading global brands, numerous universities and hundreds of volunteers have contributed immeasurably to assist the excluded by social business, the government should also play its due role. The combination will render Bangladesh an important hub of social business. That again could be Bangladesh’s international brand.

We welcome all comments and feedback at isasblog@nus.edu.sg

Transit, the Great Wall of India and Indo-Bangla Relations

M. Shahidul Islamshahid1
Research Associate, ISAS

Like most border-sharing neighbours the relations between India and Bangladesh have seen highs and lows owing to structural problems and cyclical issues. However, the Indo-Bangla ties have improved markedly in recent years, particularly following the Sheikh Hasina-led Awami League (AL) government’s return to power in December 2008. The joint communiqué signed by the two countries during the Bangladeshi Prime Minister’s visit to India in January 2010 has paved way for a new trajectory in India-Bangladesh relations.

As far as regional connectivity is concerned, notably transit, there are some encouraging developments. Sheikh Hasina’s government took a political risk by granting transit to India. As per the agreement, Bangladesh will allow use of Mongla and Chittagong sea ports for movement of goods to and from India through road and rail. This might prompt many to believe that the Indo-Bangla transit deal is likely to open a new era in South Asia’s regional connectivity. However, political rhetoric may hide the reality. To what extent New Delhi wants to engage with Bangladesh is an issue that deserves a closer look.

While the transit and transhipment facilities are likely to benefit India by slashing down its transportation cost drastically, Bangladesh also stands to gain if an agreement is made on service fees. Dhaka and Delhi have not capitalised on the momentum created towards regional connectivity by dealing with the issues in a transparent manner.

Moreover, economists are of the opinion that while transit facilities are essential to increase regional connectivity, there is a need for strong trade relations between Bangladesh and the northeastern region (which is geographically more intimate with Bangladesh than its mainland) to sustain the relations. If natural trade between the two regions is not allowed, the illicit trade and extremism in the borders may not be contained.

Moreover, the Indian authorities are implementing a mega project by fencing of its border with Bangladesh which often touted as the “Great Wall of India”. India’s two-pronged approach concerning Bangladesh is that on the one hand it asks for transit facilities for better connectivity in the region and on the other hand fences the border. This has cast doubts on New Delhi’s commitment to engage with Dhaka. Moreover, it was expected that in line with improved bilateral ties the Indian security forces would demonstrate some restraint on the border. However, a recent report shows that Indian border guards killed 136 Bangladeshis since January 2009.

The present government in Bangladesh has adopted a new paradigm as far as its regionalism approaches are concerned. It now wants to engage New Delhi in various infrastructure projects that should involve only Myanmar and China. Newspaper reports reveal that Dhaka intends to involve India in the proposed Chittagong-Myanmar-Kunming tri-nation road link. Moreover, the Bangladeshi Foreign Minister of late opined that Dhaka would happily agree to Indian involvement in deep seaport development project in Chittagong, although New Delhi is far behind Beijing both in terms of financial and technical capacities.

AL’s over reliance on New Delhi is understandable. This is largely due to the polarisation of politics in Bangladesh. The Bangladesh Nationalist Party (BNP) does not have good ties with New Delhi, which makes Beijing a natural partner for the party in South Asian geo-politics. On the other hand, historically AL’s relations with India have been very warm and the party does not want to disturb its terms with New Delhi even if they come at the cost of the country’s interest. As a result, the relations between the two countries have not been institutionalised.

Against the will of common people the foreign policy of the current government in Bangladesh focuses primarily on India at the cost of developing strong ties with other major powers. The masses desire better bilateral ties with New Delhi, but at the same time would not like Bangladesh to be treated as a “satellite state” of India.

So, what is the immediate future of Indo-Bangla relations? So long as AL is in power, the current policy is likely to continue. If BNP returns to power in the next general elections (owing to an anti-incumbency factor) then in the presence of the structural flaws in relations between the two countries, the progress made in recent years might come to naught.

We welcome all comments and feedback at isasblog@nus.edu.sg.

The Crisis of Governance in South Asia

M. Shahidul Islamshahid1
Research Associate, ISAS

While the developments in Pakistan in the past decade as far as its governance issues are concerned are highly disturbing, the situation is not very rosy in other parts of South Asia either. The other dominant countries of South Asia have had democratic governments installed but the state of governance in all the concerned countries (i.e., India, Bangladesh and Sri Lanka) has become a matter of serious concern in recent times.

The Congress-led UPA government in India has been subject to much criticism in recent months when the media revealed, among others, a number of high profile scams involving politicians and corporate houses. Indeed with mounting corruption allegations and poor governance, the fiscal year 2010-11 was nothing short of an annus horribilis for the Singh government. The nexus between politics and business largely owing to corporate interest has severely undermined good governance, ethos of politics and equity-based growth in South Asia’s largest country. The magnitude of the 2-G scam alone is larger than the total GDP of Nepal. If one is concerned about the India Cables released by the wikileaks, which India’s influential daily the Hindu posted on its website, the level of political and corporate corruptions in India shows no sign of abatement.

In Bangladesh’s 2008 elections, the Sheikh Hasina-led Awami League (AL) returned to power with a two-third majority. However, under her leadership, if not dictatorship, the country’s state of governance has hit an all time low since the nation’s transition to democracy in 1990. Practically all organs of the state have been highly politicised. The government is accused of amending Bangladesh’s constitution in line with AL’s political interests. The anti-corruption commission has been made ineffective. “For my friends, anything; for my enemies, the law” is the mantra of the ruling government.

The issue of war crimes, violation of human rights and the question of Tamil integration have put the Sri Lankan government under severe international pressure since the war against Liberation Tigers of Tamil Eelam ended in May 2009. President Mahinda Rajapaksa is accused of concentrating power both for his family and himself. The 18th Amendment to the constitution is being called a de facto constitutional coup. According to a report by the International Crisis Group, the amendment gives Rajapaksa a very real chance of remaining in power indefinitely.

The available governance indicators also support the state of poor governance in South Asia. The World Bank’s Worldwide Governance Indicators – voice and accountability, political stability, governance effectiveness, regulatory quality, rule of law, and control of corruption – shows that in all but voice and accountability benchmarks, South Asia’s governance quality has deteriorated in recent years.

Interestingly, the state of governance in South Asia is deteriorating at a time when the key economies of South Asia bar Pakistan demonstrated extraordinary economic growth in recent decade led by India.

While the nexus between economic growth and corruption (an inverse function of good governance) is inconclusive, the relations between the two variables in South Asia perhaps resemble an inverted U-shaped Kuznets curve (the concept originally introduced to explain inequality) implying that corruption increases over time while a country is developing, and then after a certain average income is attained, corruption begins to decrease.

South Asia’s recent experience with regards to governance problems generate some food for thought that can be studied further for the wider benefit of the region:

1.      Is South Asia’s rapid economic growth creating more room for corruption that is deteriorating the region’s state of governance?

2.      In the case of Bangladesh and Pakistan, it is argued that due to the lack of good institutions, corruption perhaps greases growth in the short run to some extent but in the long-run it costs growth. However, India’s high growth rates make the issue more complex and puzzling.

3.      While the causes of poor governance in South Asia are not unique, the country specific reasons stand out. Corporate interests in India, political interests in Bangladesh, ethnic issues in Sri Lanka and military interests in Pakistan are perhaps four broad areas that affect the governance structures of South Asia adversely.

We welcome all comments and feedback at isasblog@nus.edu.sg.