Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences [NOOK Book]


Experts have long questioned the effect of currency undervaluation on overall GDP growth. They have viewed the underlying basis for this policy?intervention in currency markets to keep the price of the home currency cheap?as doomed to failure on both theoretical and empirical grounds. Moreover, the view has been that overvalued currencies hurt economic growth but undervalued currencies cannot help in growth acceleration. A parallel belief has been that the real exchange rate?that is, a country's competitive ...

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Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences

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Experts have long questioned the effect of currency undervaluation on overall GDP growth. They have viewed the underlying basis for this policy—intervention in currency markets to keep the price of the home currency cheap—as doomed to failure on both theoretical and empirical grounds. Moreover, the view has been that overvalued currencies hurt economic growth but undervalued currencies cannot help in growth acceleration. A parallel belief has been that the real exchange rate—that is, a country's competitive ranking—cannot be affected by merely changing the nominal exchange rate. This view is grounded in the belief, and expectation, that inflation follows any devaluation of currency. Hence, the conclusion that the real exchange rate cannot be affected by policy.

However, given China's remarkable performance in recent decades, this traditional view is being reexamined. China devalued its currency by large amounts in the 1980s and early 1990s; instead of inflation, it achieved high growth. Today, there is near-universal demand for China to significantly revalue its currency.

This book examines the veracity of various propositions relating to currency misalignments, and their effect on various items of policy interest. The author subjects more than a century of global exchange rate management and growth outcomes to rigorous empirical analysis and demonstrates convincingly that a country can systematically devalue and yet prosper.

The analysis helps in interpreting several phenomena, especially for the last three decades, which have witnessed high economic growth in developing countries, a widening of global imbalances, and a sharp increase in reserve accumulation, particularly among high-growth Asian economies. The book shows that these events are strongly linked via a consistent policy of currency undervaluation in Asian economies.

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Product Details

  • ISBN-13: 9780881326512
  • Publisher: Peterson Institute for International Economics
  • Publication date: 8/29/2012
  • Sold by: Barnes & Noble
  • Format: eBook
  • File size: 13 MB
  • Note: This product may take a few minutes to download.

Meet the Author

Surjit S. Bhalla is managing director of Oxus Research and Investments, a New Delhi-based economic research, asset management, and emerging-markets advisory firm. He taught at the Delhi School of Economics and worked at the Rand Corporation, the Brookings Institution, and at both the research and treasury departments of the World Bank. He has also worked at Goldman Sachs (1992-94) and Deutsche Bank (1994-96). He is author of Imagine There's No Country: Poverty, Inequality, and Growth in the Era of Globalization (2002). His research interests are fiscal policy (flat tax?), economic history (do institutions cause growth?), and macroeconomic policy (the role of exchange rates in economic development). He has been a member of several government of India committees on economic policy, most recently the committee on capital account convertibility. He is on the board of India's largest think tank and is an appointed member of the National Statistical Commission of India. He is also a regular contributor to newspapers and magazines on economics, politics, and cricket. His first book, Between the Wickets: The Who and Why of the Best in Cricket (1987), developed a model for evaluating performance in sports.
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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


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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