Devaluing to Prosperity

Description

The last three decades have witnessed high economic growth in developing countries, a widening of global imbalances, and a sharp increase in reserve accumulation, especially among high-growth Asian economies. This book illustrates that these events are strongly linked via a consistent policy of currency undervaluation in Asian economies. From being one of the poorest countries just 30 years back, China is today arguably the largest country in the world in terms of purchasing power parity (PPP) of output. Its enhanced role in the global economy is linked, in part, to the manner in which it has set the exchange value of its currency. The demand for signi?cant revaluation of the Chinese yuan has been near universal in recent years. In Europe, a common currency, the Euro, brought large bene?ts to the member countries. But the loss of competitiveness from a strong Euro for some countries within the Eurozone precipitated large current account imbalances and hence the ongoing euro crisis. The book examines the veracity of various propositions relating to currency misalignments and their effect on several items of policy interest. It provides empirical evidences from 180 countries over 150 years to expose the methodological limitations. These limitations are caused by measurement problems in estimates of currency undervaluation in previous analyses of exchange rate management and growth. The book analyses such evidences to elucidate that   •  currency undervaluation leads to an increase in competitiveness and boosts investment and generates extra growth; •  competitiveness can be enhanced by ‘standing still’, or accumulating reserves by preventing the currency from appreciation; •  the global economic system becomes unstable if too many countries, especially large countries, pursue this beggar-thy-neighbour approach; and •  the major realignment of the dollar has to come with respect to Asia (excluding Japan).