Rethinking money

"THERE is no fully flexible exchange rate regime in developing economies," said Robert Mundell, Nobel Prize winner and professor of economics at Columbia University. Speaking at the American University in Cairo last week, Mundell said that governments of developing nations usually have to intervene to create a balance in market supply and demand for hard currency.

In a seminar entitled, "Currency areas, monetary unions and the international monetary system: Do we need to rethink the foundations?", Mundell pointed out that the flexible exchange rate regime is not a stand-alone policy as it must always be accompanied by other monetary rules. He explained that a flexible exchange rate is best implemented when accompanied by a monetary policy targeting hyper- inflation.

Mundell, one of the chief architects of Europe's common currency, predicts that by 2040 the world will have at least five strong currency areas like that of the euro zone. Preparing for these common currencies requires a lot of time and effort. It took the 12 European Union countries three decades to abandon their local currencies in order to start using the euro.

Mundell also forecasts that the Middle East and Africa will develop their own common currencies within 40 years. These could include two different currencies -- one of which could be an Afro-European currency used by some African countries with their main European trading partners.

He also predicts that the map of currency areas will change, with a possible merger of the euro, dollar and yen zones. A new strong currency might replace that of member countries in the Asia-Pacific Economic Cooperation forum (APEC), which includes the United States, Australia and Asian countries such as Japan and China.

Clarifying the prerequisites for such unions, Mundell said that countries within the same currency zone should adopt a common monetary policy, set a common inflation rate and use a common benchmark to measure it.