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Currency Wars

Currency Wars

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Published by: nguyenman146 on Oct 31, 2011
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WORKING PAPER NO. 45
CHINESE MERCANTILISM:CURRENCY WARS AND HOW THE EAST WAS LOST
 
SURJIT S. BHALLA
 
JULY, 1998
INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL ECONOMIC RELATIONS
 
CORE-6A, 4
TH
FLOOR, INDIA HABITAT CENTRE, LODI ROAD, NEW DLEHI-110 003
 
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Foreword
The Asian financial crisis has generated a lot of research, analysis and debate.The exact causes of the crisis are not firmly established, although varioushypotheses have been offered. This paper presents one view of the genesis ofthe East Asian crisis. Several explanations are examined: managed exchangerates, over and undervalued currencies, crony capitalism, asset bubbles,Japanese devaluation, or “too much” capital account liberalization.A large part of the analysis centers around the proposition that the regime ofmanaged exchange rates was at the core of the problem. In addition, the paperoffers an additional contributory cause of the crisis - China’s mercantilist policy.The role of the international system in allowing China to devalue its currency (byover 50 percent), despite burgeoning trade surpluses, is also addressed. Thepaper also explores the question of whether the Chinese economy needed anydevaluation in the early nineties.I have no doubt that this paper will provoke debate and contribute to a betterunderstanding of an issue which is occupying the minds of most policy makersaround the world.
Isher Judge Ahluwalia
Director & Chief ExecutiveICRIER, New Delhi
 
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Table Of Contents
Foreword.........................................................................................................................2Table Of Contents...........................................................................................................3CHINESE MERCANTILISM :.......................................................................................4CURRENCY WARS AND HOW THE EAST WAS LOST............................................41. INTRODUCTION.................................................................................................42. CHINA, DEVALUATION, AND MERCANTILISM - SEEDS OF A CRISIS......6a. The Data............................................................................................................7b. The Evidence.....................................................................................................8c. Genesis of the Crisis - Did China need to devalue the yuan in 1991-93 ?............8d. The Importance of Chinese Devaluation............................................................9(i) China vs. Greater China data......................................................................10(ii) Export and Import data...............................................................................11(iii) The counter-factual...................................................................................12e. Summarizing the Macro Evidence....................................................................13f. The Micro Evidence.........................................................................................13g. Did Devaluation Hurt Chinese Imports (and Asian Exports) ?..........................14h. Political Economy of Trade Surpluses.............................................................14i. Mercantilism defined........................................................................................14 j. Mercantilism Index says YES...........................................................................15k. Why Can’t All Countries be Mercantilist ?......................................................153. ALTERNATIVE EXPLANATIONS OF THE CAUSES.....................................15a. Did Japan Devaluation Cause the Crisis ?........................................................15b. Did Capital Account Liberalization cause the problem ?..................................16c. Is Capital Account Liberalization not good for LDCs ?....................................17d. Crony Capitalism and Non-Performing Assets of Banks..................................18e. Equity and Property Markets............................................................................19f. The perverse role of fiscal surpluses.................................................................194. WHAT DID HAPPEN ?......................................................................................20a. Capital flows and fixed exchange rates.............................................................20b. Zero hedging costs...........................................................................................20c. Floating exchange rates would have avoided the crisis.....................................21d. Efficient Excess Capacity Creation..................................................................21e. How to Compete?............................................................................................21f. Response of East Asia......................................................................................21g. Plaza is the parallel..........................................................................................215. CONCLUSIONS.................................................................................................22References....................................................................................................................37

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