Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences

Overview

Surjit S. Bhalla is chairman of Oxus Investments, a New Delhi-based "hedge fund" and emerging markets advisory firm. He was a research economist at Rand Corporation, the Brookings Institution, the World Bank, and the Policy Group and an economist/strategist at the World Bank, Goldman Sachs, Deutsche Bank, and Oxus Investments. He has served on several committees of the government of India (the capital account convertibility committees of 1997 and 2006 and the advisory committee on secondary markets for the ...

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Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences

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Overview

Surjit S. Bhalla is chairman of Oxus Investments, a New Delhi-based "hedge fund" and emerging markets advisory firm. He was a research economist at Rand Corporation, the Brookings Institution, the World Bank, and the Policy Group and an economist/strategist at the World Bank, Goldman Sachs, Deutsche Bank, and Oxus Investments. He has served on several committees of the government of India (the capital account convertibility committees of 1997 and 2006 and the advisory committee on secondary markets for the Securities and Exchange Board of India, among others). He was an appointed member of the National Statistical Commission of India (2007-10). He is on the governing board of the National Council of Applied Economic Research, and since 2002, has been a regular invitee to the Aspen Institute Program on the World Economy.

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Product Details

  • ISBN-13: 9780881326239
  • Publisher: Peterson Institute for International Economics
  • Publication date: 10/15/2011
  • Pages: 263
  • Product dimensions: 6.00 (w) x 8.80 (h) x 0.70 (d)

Table of Contents

Preface xiii

Acknowledgments xvii

1 Introduction 1

What Determines Growth: Geography? Technology? Policy? 2

The Primacy of Exchange Rate Policy 4

A Guide to the Book 5

2 Determinants of Economic Growth 11

The Historical Context 12

Some Explanations of Growth 12

Growth since 1950 13

Popular Theories 15

Growth Policies: The Washington Consensus 29

3 Currency Valuation, Savings, and the Current Account 33

Currency Valuation and Savings 34

Current Account Balance and Growth 37

Currency Valuation and the Current Account 39

4 Measuring Currency Valuation 41

Equilibrium Exchange Rates 41

Real Exchange Rates 42

Currency Misalignments 48

Real Exchange Rates and Income 52

Different Measures of Currency Valuation 58

Income, Currency Valuation, and Growth: A Review 64

5 The Yin and Yang of Investment 67

Currency Valuation and Investment 67

Investment Impact of Currency Devaluation 69

Investment as the Channel of Influence 72

6 Is the Real Exchange Rate Endogenous? 77

An Endogenous Real Exchange Rate: The Theory 78

The Impossible Trinity 78

Passive Devaluation 85

Changes in Currency Valuation, 1980-2011 86

Is China a Currency Manipulator 90

In Summary 91

7 Rashomon Rules: US Dollar, Euro Dollar… 93

US Current Account Deficit 94

Valuations of the Dollar 95

Currency Valuations and the US Current Account Deficit 98

Whither the Dollar? 108

8 Currency Valuation and Growth 115

Overview 116

Econometric Models of Growth 117

Tests of Simple Growth Models 119

Conclusion 134

9 Policy Failures and Growth Miracles 135

Growth Successes and Failures 136

Explanations for Failure 137

Structural Breaks in Growth 139

Explaining Growth Acceleration 141

10 Mercantilism and Miracles 149

Defining Mercantilism 149

Mercantilism and Growth 153

Miracle Economics 153

11 Institutions versus Exchange Rate Policy 165

The Conventional Wisdom 166

New Evidence 168

Institutional Measures 168

Institutions and Growth: Revisiting the Evidence 171

12 Currency Undervaluation: A Time-Tested Policy for Growth 179

Nineteenth-Century Exchange Rates 180

Tariffs and Growth 183

The Yen Exchange Rate in 1950 186

13 Economics of the Yen and the Renminbi 189

Japan in the 1980s and China in the 2010s 189

DéjàVu? 191

China Is Different 196

Revisiting Paul Samuelson 205

14 Changing Times, Changing Views 209

Currency Wars 211

Why Currency Undervaluation? 211

Evidence of Malfunctions and Imbalances 212

The Seductive Appeal of Currency Undervaluation 216

One Country's Ceiling Is Another Country's Floor-Evidence on Stolen Growth 219

Breaking the Cycle 221

15 Conclusion 225

Currency Undervaluation Affects Investment and Generates Growth 225

The Dual of Currency Undervaluation is Currency Overvaluation 226

The Real Exchange Rate Can Be Influenced by the Nominal Exchange Rate 227

The Real Exchange Rate Can Be Influenced by Standing Still 227

Mercantilism is Alive and Well 228

There Are Parallels between 1870 and 1950 228

Institutions Don't Rule 228

A Postcrisis Realignment 228

Appendix A Data and Methods 233

Appendix B Bhalla (2007a) Dataset Extended to 2011 239

References 247

Index 258

Tables

2.1 Global population and income; 1950-2011 14

2.2 Average (log) growth in per capita income by region, 1951-2011 16

2.3 Running out of good luck? Growth persistence, 1960-2011 28

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