I vividly remember going to Prof. Rolleigh's office one day and asked tentatively : What is the criteria that we used to define whether a country's currency is overvalued or undervalued? With his usual sense of sarcasm, Prof. Rolleigh retorted:Waht do you mean by "we", politicians or economists? Assuming you are asking about economists, there is no consensus as far as I know.
I respect Krugman's trade model in explaining the new trade pattern after WWII, and feels he is truly an expert on trade stuff (but not currency), but after reading his writing on new york times, I cannot help wondering has he switched to a politician?
Paul Krugman's writing has revealed many assumptions he has made very implicitly and they are hard to defend. Prof. Love had it right, whenever we reach a conclusion, we were using a model implicitly, and without specification, our model can be so crude as to be inconsistent and flawed with stupid assumptions. For one thing, there has not yet been a model that can establish convincingly that any country should have no trade surplus whatsoever. This is not only counter-factual but also unsupported by theories. This might be a plausible conclusion to reach if all countries are identical, or there are all representative countries, an assumptions economists make all the time, however wrong it is.
Another serious problem is his use of China's central bank buying US assets as evidence is simply wrong. There are many sources of accumulation foreign exchange reserve. One is of course CA account--trade surplus, but the other, more relevant here is hot money and FDI. They are a big source of increase in reserve.
I am by no means denying the existence of trade surplus. It is huge, there is one thing that politicians always fail to grasp, when we look at the trade surplus to GDP ratio, maybe not so big. I am a boring person, and I love playing with economic data. One day, I did this for all economiess whose data is availabe. I get a time series data for their trade-surplus ratio from 1994 to 2008. I averaged them, and get rid of the ones with negative ratio. Then I get rid of any economy who had a trade deficit from 2000 to 2008, when there has not been a widespread currency crisis as in 1997. I ranked all the economies from highest to lowest. Mainland China is 19th! I will not conceal the fact that some economies are oil-exporters. But not all. Singapore(18/1000), Hong Kong (8.6/1000), Malaysia (7.7/1000 including the crisis in 1997). and MANY developed European countries are with much higher ratio than China(4/1000).
Finally, I need to poiint that China need to accumulate some net foreign reserve (foreign reserve-foreign liability) because of its poor fiscal stance. By poor fiscal stance , I mean consolidated debt ratio to GDP, which is two times higher than that of US, a country notorious for high debt ratio.
"But China, the largest of these emerging economies, isn’t allowing this natural process to unfold. Restrictions on foreign investment limit the flow of private funds into China; meanwhile, the Chinese government is keeping the value of its currency, the renminbi, artificially low by buying huge amounts of foreign currency, in effect subsidizing its exports. And these subsidized exports are hurting employment in the rest of the world.
ReplyDeleteChinese officials defend this policy with arguments that are both implausible and wildly inconsistent.
They deny that they are deliberately manipulating their exchange rate; I guess the tooth fairy purchased $2.4 trillion in foreign currency and put it on their pillows while they were sleeping. Anyway, say prominent Chinese figures, it doesn’t matter; the renminbi has nothing to do with China’s trade surplus. Yet this week China’s premier cried woe over the prospect of a stronger currency, declaring, “We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs.” Well, either the renminbi’s value matters, or it doesn’t — they can’t have it both ways."
Can you specifically counter his points?
And to keep in mind, Krugman's audience is the NY Times readership; while the people are probably smart, they're not going to all understand economic models...
ReplyDeleteI already countered his arguments about accumulating foreign reserve. And experience in Latin America (if not Asia) taught China to limit hot money. As for the employment issue, he just ignore the discontinuity issue in exchange rate, as explained by the Catastrophe theory or hysteresis hypothesis. So not manipulating currency and protecting employment could be consistent.
ReplyDeleteAlso, I doubt that an average NYT reader are more rational than emotional. We are human beings and by definition, we are more often than not, stupid.
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