Exchange-rate volatility is a problem for trade … especially when financial development is low
Jérôme Héricourt, Sandra Poncet19 January 2013
The increasing volatility of exchange rates after the fall of the Bretton Woods agreements has been a constant source of concern for both policymakers and academics. Does exchange-rate risk dangerously increase transaction costs and reduce gains to international trade? This column uses recent research to argue that there is indeed a negative impact of exchange-rate volatility on firms’ exporting behaviour, magnified for financially vulnerable firms and dampened by financial development. Thus, emerging countries should be careful when relaxing their exchange-rate regime.
Helmut Reisen, Moritz Schularick, Edouard Turkisch
The increasing volatility of exchange rates after the fall of the Bretton Woods agreements has been a constant source of concern for both policymakers and academics. Developed countries fought hard in the 1980s to limit US dollar fluctuation (one thinks of the Plaza and Louvre’s agreements, respectively in 1985 and 1987), and some European countries took an even more radical decision by giving up their national currency for the euro in 1999.
Capital controls are back in vogue. This column argues that we should distinguish between episodic controls (gates) and long-standing controls (walls). Research shows that the apparent success of 'walls' in China and India tells us little about the consequences of capital controls imposed or removed in countries like Brazil and South Korea, as circumstances change. Walls and gates are fundamentally distinct, and policy debate needs to take into account these differences.
If trade barriers are managed by inefficient institutions, trade liberalization can lead to greater-than-expected gains. This paper examines Chinese textile and clothing exports before and after the removal of externally imposed quotas. Both the surge in export volumes and the decline in prices after the quota removal are driven by net entry, implying that the pre-liberalisation quota allocation is not based on firm productivity. Removing this misallocation accounts for a substantial share of the overall productivity gains associated with the quota removal.
Growth slowdowns redux: Avoiding the middle-income trap
Barry Eichengreen, Donghyun Park, Kwanho Shin11 January 2013
The rapid economic growth of emerging markets is the leading headline of our age. But growth is slowing. Using new research, this column asks why this might be, and how policymakers might remedy flagging economies. The answer seems to be education. Recent research suggests, for instance, that the rapid expansion of secondary and tertiary education helped Korea’s successful transition from middle- to high-income status, very much unlike Malaysia and Thailand. Whether China can avoid the middle-income trap will depend in part upon developing an education system producing graduates with skills that Chinese employers require.
The rapid economic growth of so-called emerging markets is one of the leading storylines of our age. Arguably, it is the most important economic development affecting the world’s population in the first decade of the 21st century. Rapid economic growth has lifted millions out of poverty. It has accounted for the vast majority of global growth in a period when the advanced countries have struggled economically and financially.
Philippe Bacchetta, Kenza Benhima, Yannick Kalantzis09 January 2013
China is perennially accused of currency manipulation. Yet, this column argues that a weak currency value doesn’t necessarily reflect currency manipulation. China is a fast growing economy with strong financial frictions and a high saving rate, and such countries naturally have weak currencies. Instead of focussing on accusations of currency manipulation, it might be more helpful for economists to encourage policies that foster Chinese consumption, gradually leading the renminbi to an appreciating path.
In the recent US presidential campaign, China was accused again of currency manipulation. In other words, the Chinese central bank is accused of maintaining the exchange rate at an artificially low level compared to its equilibrium value, including heavy intervention in the foreign exchange market. There has been a fierce debate on this issue in recent years, including on VoxEU.org (e.g., Persaud 2011, Reisen 2011, Reisen et al. 2011, Storesletten et al. 2010).
Trade liberalisation and embedded institutional reform: Evidence from Chinese exporters
Amit Khandelwal, Peter K. Schott , Shang-Jin Wei15 January 2013
The institutions that manage trade barriers are subject to corruption, imposing additional distortions. This column shows that in China, the government misallocated quota licenses permitting firms to export. When the US and EU abolished quotas governing textile exports in 2005, China experienced productivity gains not only from the actual elimination of the quota but also from the termination of the misallocation due to inefficient licensing.
Economists traditionally assess the welfare losses of trade barriers without considering the underlying institutions that support them. In fact, these institutions may amplify welfare losses substantially. Corrupt customs agents, bureaucratic red tape and the withholding of goods in bonded warehouses may favour some firms at the expense of others, resulting in a substantial misallocation of resources. Anecdotal evidence along these lines is easy to spot.
China’s pure exporter subsidies: Protectionism by exporting
Fabrice Defever, Alejandro Riaño04 January 2013
The West perennially complains about China subsidising industry geared towards its domestic market. But what will happen when China enacts its latest Five Year Plan’s emphasis on domestic growth? This column argues that ending ‘pure-exporter subsidies’ – subsidies that boost Chinese exports while simultaneously protecting the least efficient, domestically oriented firms – will benefit Chinese consumers, but will cost the rest of the world.
On 17 September last year, the US requested consultations with China concerning a wide range of export-contingent measures – grants, tax preferences and interest-rate subsidies, totalling at least $1 billion – in apparent violation of the WTO’s Agreement on Subsidies and Countervailing Measures, China’s accession protocol and article XVI of the GATT. The EU joined the consultations shortly after on 28 September.
With the rise of complex, globalised supply chains is the real effective exchange rate (REER), the most commonly used measure of competitiveness, now outdated? If it is, what should replace it? This column presents a ‘Value-Added REER’ and shows that it differs substantially from the conventional REER. Because it is possible to construct a new Value-Added REER from existing data, policymakers interested in improving their understanding of competitiveness might well consider including it in their toolbox.
Real effective exchange rates (REERs) are widely used to gauge competitiveness. Yet conventional REERs, based on gross trade flows and consumer price indexes (CPIs), are not well suited to that role when imports are used to produce exports – i.e., with vertical specialisation in trade.
The renminbi bloc is here: Asia down, the rest of the world to go?
Arvind Subramanian, Martin Kessler27 October 2012
As China becomes ever more important in the global economy, will its currency take on an international role? This column argues that in some sense, this is already happening – an increasing number of emerging-market currencies seem to track (co-move with) the renminbi – and the trend is set to continue.
The staggering economic rise of China in the last three decades leads to the question of the potential internationalisation of its currency, the renminbi (RMB). Internationalisation has different dimensions. An international currency is widely used in financial and trade transactions, and crucially it is used as a store of value. Some, like Eichengreen (2011) and Frankel (2011) see a potential global role for the RMB, provided important ancillary reforms to the domestic financial system and to the financial account first take place.
There has been much talk among economists of ‘global rebalancing’, with the focus on China and the US rebalancing their current accounts. But this column argues that the type of rebalancing that will bring real gains to the global economy is one that will be shaped by many countries, both industrial and developing.
The discussion on global rebalancing is at a crossroads, and much of what will shape policy options moving forward will have to be taken up in roundtables that include more countries than the two usual suspects, China and the US.