Rebalancing the Global Economy
Imbalances are a dominant feature of the world economy and they are often seen as having contributed to the global financial crisis. A revaluation of the Chinese currency is often recommended to reduce the current account imbalance between the US and China. This article argues that emerging Asia’s current account surpluses are a necessary condition for rapid catch-up growth and should not be eliminated soon; instead the excessive dollar bias in Asian holdings of external claims needs to be reduced, because the problem behind the recent crisis was that the emerging economies have placed their foreign exchange reserves almost exclusively in USD assets and have neglected alternative assets like the Euro and the Yen. A policy proposal for a common Asian peg to a basket of Euro and Yen is made.
- Policies to restore global balances must not create additional tensions for China, Asia, Europe or the United States. A cooperative management of the global economy is recommended.
- Chinese exchange rates policy must be seen in the broad context of the Asian development model. A rapid revaluation or shift to flexible exchange rates would undermine the Chinese development model and deprive the world of an immense source of economic growth.
- The undervaluation of the RMB should only gradually be removed as the Chinese economy improves productivity and catches up to advanced economies’ production standards.
- Fixed exchange rates support economic development by reducing uncertainty for investment and trade. Stabilising the exchange rates between major currencies and Asia as a region is important to allow the continuing integration of its developing economies into the world market.
- The US economy needs flexibility in exchange rate movement while it is going through the necessary adjustment of its current account balance, but not Asia. Asia should peg to a basket of euro and yen and Chinese foreign exchange reserves should be marginally shifted into these new reserve currencies. Europe must not protect its industries, but rather seek to stimulate economic growth by inviting Chinese and Asian investment by developing its financial markets.