Adopting Economic Convergence

Operations of central regulating authority, such as the RBI, in the open market are called open market operations (OMO). The most common of these operations is the buy and sale of securities. The idea is to keep multitude of economic indicators such as inflation, sensex, GDP, call / repo / reverse repo / exchange rates etc under check and have an exciting economic marketplace for global investors.

Each country has its own unique economic marketplace monitored by its proprietary central regulating authority. In most nations, these regulating authorities are strongly influenced by the political leadership. As a result, political agenda tampers the economic agenda giving rise to diverse economic strategies and implementations across nations to achieve the same underlying objective - economic growth for self.

This diversity strongly reflects itself in the global market scenario. So much has been manufactured - from itsy-bitsy benchmarks like LIBOR / EURIBOR / MIFOR to brobdingnagian Forex markets. Dedicated to exchanging 2 currencies at different rates at varying points in future, the forex market has crossed $3 trillion mark in average daily turnover and given employment to many.

Needless to say, any status quo has its share of opponents and proponents. Post World War II when the world economy was in doldrums the proponents of economic convergence came out with the Bretton Woods Agreement. Apart from setting USD as the dominant currency, it led to the foundation of IMF and the World Bank. Sadly, it met its demise in the 1960s as economies outpaced one another in terms of growth.

The probable learning was that it is not advisable to peg n-1 currencies to 1 currency as exchange rates are a factor of interest rates which in turn are a factor of their respective economies. In other words, economy is the root and exchange rate is the fruit. We are therefore inviting trouble by trying to alter the fruit without first conditioning the roots.  

In line with this concept, on 1st January 2002, 12 countries formally eliminated trade barriers and adopted a single currency regime. Though divided politically and geographically, they united economically. Today Euro zone is the second largest economy of the world, despite of not having any of the 3 financial powerhouses (US / UK / Japan) as its member countries. In 2002, they were the leading nations. . and no one ever says it's only a game when they are winning. 

Unfortunately, US has not entered 2009 on a winning note. The damage seems ongoing with news still highlighting fresh losses, bailouts and predictions such as "putting food on the table is going to be more important than putting gifts under the Christmas tree" by intellectuals like Gerald Celente. However, ‘permanent’ is ‘impossible’. Once out of the damage and into revival, adopting economic convergence might be the ‘permanent’ way forward towards everlasting growth and prosperity.