Behind currency ‘wars’

With China-bashing — for the world economy’s many ills — being the flavour of the season, the book under review has come not a day too soon.

The book is out even as protectionist lobbies in the US have been crying foul over cheap imports of both essential and inessential goods from China, aided by the perpetually undervalued Chinese yuan vis-à-vis the greenback.

But the fact remains that advanced countries too had piled up debt and printed money in the name of quantitative easing or fiscal stimulus, which has whittled some of their currencies. For emerging economies, including India and other developing countries such as Brazil, the near zero-rates in the rich world had aggravated the problem of hot capital flows to them, with the attendant ills of high interest cost and unwanted appreciation in their exchange rates.

This points to the fact that unlike in the past, the threat of currency wars is not directly related to trade imbalances and balance-of-payments crises.

Rather, as economists contend, a crucial driver is major central banks’ pursuit of experimental or unorthodox monetary measures in a bid to offset policy lapses and political dysfunction elsewhere — a point the book under review conspicuously misses in its obsessive remit to put all the blame on currency devaluations.

Currency war

Even as the author appears to have joined the anti-China bandwagon for keeping the value of its currency permanently under-valued, he cautions that the global economic system becomes unstable if too many countries, especially large ones, follow this beggar-thy-neighbour approach. To this extent, he is dispassionate when he inveighs against competitive undervaluation.

A vulnerable world economy could ill-afford any open currency war that would put paid to the budding recovery from protracted slowdown.

The author quips that “a country can devalue its way to prosperity, at the expense of other nations”. But to make this proposition the major conclusion of the book is to ignore other crucial components such as comparative advantages, resource endowments, human skills and a leap in productivity, which take an economy to the top exporter league.

It is not for nothing that policy analysts of standing argued that the deceleration in inflation in the rich world owed much to the impact of inexpensive Chinese imports, rather than more lasting structural factors which remain rigid to this day. Now that these countries are experimenting with unorthodox monetary policy in a race to the bottom, critics arraign them for keeping their currencies wantonly under-valued to improve competitiveness.

But there’s hope. “Having faced three major crises over the last 15 years — the East Asian crisis, the Great Recessions and the Euro Zone crisis — the world is poised for more collaborative currency arrangements and a better globalised future,” says the author.

The book makes interesting reading of contemporary economic events for lay and learned readers, though its price may be a deterrent.

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