East Asian Dollar Standard: Dilemmas and Prospects
Junjiu Li
Economics School, Jilin University
Mozhu Jiang
Northeast Asian Studies College, Jilin University
Summary
In the postwar period, East Asian economies have made great progress in export-oriented
industrialization. Nonetheless, economic performance of all these economies is achieved under
particular institutional circumstances, i.e., the dollar standard. In other words, the dollar standard is
the most important external constraint facing East Asian economies. It also holds even after 1997-8
Asian financial storm and 2008-9 global financial crisis. As for this issue, the extant literature
follows two lines: One line argues that the dollar standard is sustainable in East Asia. For example,
Frankel and Wei (1994) conclude that East Asia is a de facto dollar bloc rather than a yen bloc. In
Dooley et al. (2004)’s phrase, East Asian economies constitute a trade account region, in which
export-led growth is supported by undervalued exchange rates, capital controls and official capital
outflows in the form of accumulation of reserve assets claims on the center country-the United States.
According to McKinnon and his coauthor Schnabl (2004a, 2004b, 2004c), East Asian dollar
standard originates from three aspects: original sin, conflicted virtue, and fear of floating.
The other one overemphasizes the tendency of decoupling the dollar in the region. By using
a global factor model of exchange rates and a complementary event study, Fratzscher and Mehl
(2011) find evidence that the RMB has become a key driver of currency movements in emerging
Asia since the mid-2000s, and even more so since the global financial crisis. Subramanian and
Kessler (2012) show that there is already a RMB bloc in East Asia, because 7 currencies out of 10
in this region co-move more closely with the RMB (about 60 percent greater) than with the dollar,
that is, the RMB has become the reference currency in East Asia. Although Henning (2012) argues
that the rise of Renminbi bloc in terms of exchange rate arrangement is promoted by the dollar’s
persistent dominant role as trade, investment and reserve currencies, he also admits the emergence
of a loose but efficient Renminbi bloc in which Malaysia, Thailand, Singapore and the Philippines
have joined in it, and South Korea also temporarily does so after the global financial crisis.
To some extent, the two schools are reasonable. They remind us of a significant question
related to East Asian economic development: Is the dollar standard sustainable in East Asia?
Furthermore, what are dilemmas facing East Asian economies under this institutional constraint?
What about the prospects for East Asian Economic development? To answer these questions, we
need to add the political factors into the analysis of East Asian dollar standard which are neglected
by most of relevant literature. Based on this standpoint, we introduce the framework of structural
powers which consist of security structure, production structure, financial structure, knowledge
structure, and trade structure. Different from Strange (1988)’s “pyramid” model, we argue that trade
structure is of significance in supporting the sustainability of East Asian dollar standard. Among
these power structures, financial structure is more important than others. On the basis, we develop
a so called “diamond” model in which financial structure lies in the center of structural powers.
This research includes four sections: The first section briefly reviews the extant literature
about East Asia’s regional monetary system. The second one refers to the nature, characteristics,
and dilemmas of East Asian dollar standard. The third one expounds how structural powers support
the sustainability of East Asian dollar standard. The fourth one is concluding remarks and our
suggestions for sustainable economic development of East Asian economies. The main results of
the research are as follows:
1. Only if we consider the political factors in East Asian regional monetary system can we
fully understand the sustainability of East Asian dollar standard.
2. Under the dollar standard, East Asian economies are confronted with double dilemmas:
On the one hand, because of export oriented industrialization strategy, such key factors for East
Asian development as capital, technology, and market depend highly on external sources especially
on the United States. Hence, East Asian economic development is to some degree exogenous. On
the other hand, because of the dollar’s dominant role in East Asia, the United States can efficiently
force East Asian economies to shoulder the responsibility of adjusting balance of payments.
3. The dollar standard will be sustainable as long as the United States has the authority over
East Asian economies in such power structures as security structure, production structure, financial
structure, knowledge structure, and trade structure. For this reason, it is so early and rash to draw
conclusions about decoupling the dollar or the rise of Renminbi bloc in East Asia.
4. Monetary and financial cooperation in East Asia has to some extent fallen into the
deadlock, there are two possible prospects for East Asian economic development. One is exogenous
and therefore unsustainable development constrained by the dollar standard. The other is
endogenous and steady development under the circumstances of the rise of RMB bloc in East Asia,
in which China can act as the provider of regional public goods such as steady monetary order, open
trade system. To succeed in promoting RMB’s international use in East Asia, China needs to
enhance its position in four main structural powers: production structure, financial structure,
knowledge structure, and trade structure.