Transcript A New Paradigm for Asian Development: Chinese Growth

A New Paradigm for Asian
Development: Chinese Growth,
Exports, and the
Exchange Rate"?
Andrew K. Rose
UC Berkeley
The “Chinese Threat”
 Key Point:
– Chinese Import Penetration already High
– Likely to persist and grow
– Special competitive pressures on Europe
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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
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Asian Paradigm for Development
 Competitive (Cheap) Unemployed Labor
Absorbed into Manufactured Sector
– Example of key theory of W.A.Lewis (Nobel
Laureate)
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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
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Special Role of USA
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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
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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
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Where Does Europe Fit In?
 No Direct Role
 Still, Large Indirect Role
– Euro floats against $
– Europe has powerful central bank with
independent monetary policy
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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.
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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
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It isn’t Only China!
 Other Asian Economies Waiting in Line
behind China
– India
– Indonesia
– Vietnam …
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Historical Precedent
 European Development in 1950s and 1960s
 Export-Lead Growth to transfer underemployed Europeans from countryside to
manufacturing
 Revival of “Bretton Woods” regime,
prevailed before 1971
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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.
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