A New Paradigm for Asian Development: Chinese Growth, Exports, and the Exchange Rate"?

1. A New Paradigm for Asian Development: Chinese Growth, Exports, and the Exchange Rate"?  Andrew K. Rose UC Berkeley

2. The “Chinese Threat” • Key Point: • Chinese Import Penetration already High • Likely to persist and grow • Special competitive pressures on Europe Asian Development

3. What’s the Fundamental Issue? • Chinese Communist Party Needs Growth to Survive Politically • Growth is Required to Absorb Massive Unemployment in Chinese Countryside • Agricultural Peasants Must Be Transformed Into Manufacturing Workers • Exports Provide Only Possible Outlet Asian Development

4. Asian Paradigm for Development • Competitive (Cheap) Unemployed Labor Absorbed into Manufactured Sector • Example of key theory of W.A.Lewis (Nobel Laureate) Asian Development

5. Implications for West • China has every incentive to maintain under-valued exchange rate • Under-valuation the key to rapid export growth • Right in theory • Effective in practice (past twenty years!) • Hence rapid accumulation of US$ reserves, as China maintains under-valued peg to US Asian Development

6. Special Role of USA • US is issuer of $, global reserve currency • East Asians fixes against US$ • US is largest, most open economy • US willing to handle large, persistent current account deficits Asian Development

7. Special Role of USA, contd • American FDI high in Asia • High Returns on Asian Investments help protect against American Protectionism • China Importing Financial Services, since Domestic Financial Sector Weak Asian Development

8. Where Does Europe Fit In? • No Direct Role • Still, Large Indirect Role • Euro floats against $ • Europe has powerful central bank with independent monetary policy Asian Development

9. Does the Election Matter? • Bush as likely winner • Democrats traditionally less protectionist in office • Limited tools to intervene anyway • So it’s hard to see much change in American policy. Asian Development

10. Asia and the Euro • Crisis in Confidence Possible • American Current Account Deficits large • 5% GDP, highly persistent • Dollar Depreciation Resisted by Asians • But Euro Floats Freely! • Euro Likely to Continue to Appreciate Against Dollar Asian Development

11. It isn’t Only China! • Other Asian Economies Waiting in Line behind China • India • Indonesia • Vietnam … Asian Development

12. Historical Precedent • European Development in 1950s and 1960s • Export-Lead Growth to transfer under-employed Europeans from countryside to manufacturing • Revival of “Bretton Woods” regime, prevailed before 1971 Asian Development

13. Conclusions • WTO may be a distraction • Doha Negotiations • Russia Accession • Institutional Design • Multilateralism vs. Regionalism • Exchange Rate Effects Dramatically More Important than Tariffs, NTBs, etc. Asian Development