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

3
Whats 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

4
Asian Paradigm for Development

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

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

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

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

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

9
Does the Election Matter?

• Bush as likely winner
• Democrats traditionally less protectionist in
  office
• Limited tools to intervene anyway
• So its hard to see much change in American
  policy.

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

11
It isnt Only China!

• Other Asian Economies Waiting in Line behind
  China
• India
• Indonesia
• Vietnam

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

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.