Transcript A New Paradigm for Asian Development

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
Asian Development
2
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
3
Asian Paradigm for Development
 Competitive (Cheap) Unemployed Labor
Absorbed into Manufactured Sector
– Example of key theory of W.A.Lewis (Nobel
Laureate)
Asian Development
4
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
5
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
6
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
7
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
8
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
9
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
10
It isn’t Only China!
 Other Asian Economies Waiting in Line
behind China
– India
– Indonesia
– Vietnam …
Asian Development
11
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
Asian Development
12
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
13