1. A New Paradigm for Asian Development: Chinese Growth, Exports, and the Exchange Rate"? A New Paradigm for Asian Development: Chinese Growth, Exports, and the Exchange Rate"? Andrew K. Rose UC Berkeley

2. Asian Development2 The “Chinese Threat”  Key Point: –Chinese Import Penetration already High –Likely to persist and grow –Special competitive pressures on Europe

3. Asian Development3 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

4. Asian Development4 Asian Paradigm for Development  Competitive (Cheap) Unemployed Labor Absorbed into Manufactured Sector –Example of key theory of W.A.Lewis (Nobel Laureate)

5. Asian Development5 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. Asian Development6 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. Asian Development7 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. Asian Development8 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. Asian Development9 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.

10. Asian Development10 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. Asian Development11 It isn’t Only China!  Other Asian Economies Waiting in Line behind China –India –Indonesia –Vietnam …

12. Asian Development12 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. Asian Development13 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.