CURRENCY BOARDS IN ASIA : LESSONS FROM HONG KONG'S EXPERIENCE

Abstract

In the light of the economic crisis of in the Southeast Asian region that began as a currency crisis, this thesis is an analysis of whether establishing a currency board system in these countries would improve their situation. The objective of this thesis is to examine whether having a currency board system in these countries would serve to alleviate their financial woes as claimed by renowned economists such as Professor Steve Hanke of Johns Hopkins University. Therefore, I will be using the experience of Hong Kong in 1983 when it implemented the system, to examine whether a system that has worked for Hong Kong then, would also work for these Southeast Asian economies now. Hence, this thesis compares the economy of Hong Kong during its currency crisis of 1983 with the economies of the Asian countries now, to see if the success of its implementation then, warrants its need to be implemented now. Moreover, it is important to find out the other consequences of its implementation. In addition, this thesis also explores the long-term consequences of its implementation on the health of the Hong Kong economy, and tries to determine the sustainability of the peg in the long run. My thesis includes a literature review of what currency board systems are about, how they work, their advantages and disadvantages, as well as a description of the evolution of the currency board system in Hong Kong, and its subsequent consequences. It also includes a section on the current economic turmoil faced by the Southeast Asian economies, the postulations by various economists regarding its causes as well as their suggestions for improving the current situation. A comparative study will be made between Hong Kong during its 1983 currency crisis, and these Southeast Asian economies, to evaluate the relevance of Hong Kong's experiences as well as the consequences of implementing such a system. My conclusion is that currency boards should not be seen as a panacea for their economic woes as it has its own unfavourable consequences. From the example of Hong Kong, we see that in the long run, it may even be harmful for the economy to keep the peg. Moreover, because the circumstances faced by Hong Kong during that period is very different from those facing the Asian economies, a success story for one may not necessarily mean the same for the other. Instead, the root cause of the economic problems in these countries should be dealt with first.