Tue, Sep 14, 2010 - Page 8 News List

Strong yuan: good for poor nations?

By Dani Rodrik

China’s trade balance is on course for another bumper surplus this year. Meanwhile, concern about the health of the US economic recovery continues to mount. Both developments suggest that China will be under renewed pressure to nudge its currency sharply upward. The conflict with the US may well come to a head during US Congressional hearings on the yuan to be held this month, where many voices will urge US President Barack Obama’s administration to threaten punitive measures if China does not act.

Discussion of China’s currency focuses around the need to shrink its trade surplus and correct global macroeconomic imbalances. With a less competitive currency, many analysts hope that China will export less and import more, making a positive contribution to the recovery of the US and other economies.

In all this discussion, the yuan is viewed largely as a US-China issue, and the interests of poor countries scarcely get a hearing, even in multilateral forums. Yet a noticeable rise in the yuan’s value may have significant implications for developing countries. Whether they stand to gain or lose from a yuan revaluation, however, is hotly contested.

On one side stands Arvind Subramanian, from the Peterson Institute and the Center for Global Development. He says that developing countries have suffered greatly from China’s policy of undervaluing its currency, which has made it more difficult for them to compete with Chinese goods in world markets, retarded their industrialization and set back their growth.

If the yuan were to gain in value, poor countries’ exports would become more competitive and their economies would become better positioned to reap the benefits of globalization. As such, poor countries must make common cause with the US and other advanced economies in pressuring China to alter its currency policies, Subramanian says.

On the other side stand Helmut Reisen and his colleagues at the Development Centre of the Organisation for Economic Co-operation and Development, who contend that developing countries — especially the poorest among them — would be hurt if the yuan were to rise sharply. Their reasoning is that currency appreciation would almost certainly slow China’s growth, and that anything that does that must be bad news for other poor countries as well.

They buttress their argument with empirical work that suggests growth in developing countries has become progressively more dependent on China’s economic performance. They estimate that a slowdown of 1 percentage point in China’s annual growth rate would reduce low-income countries growth rates by 0.3 percentage points.

To make sense of these two contrasting perspectives, we need to step back and consider the fundamental drivers of growth. Strip away the technicalities, and the debate boils down to one fundamental question: What is the best and most sustainable growth model for low-income countries?

Historically, poor regions of the world have often relied on what is called a “vent-for-surplus” model. This model entails exporting to other parts of the world primary products and natural resources such as agricultural produce or minerals.

This is how Argentina grew rich in the 19th century, and how oil states have become wealthy during the last 40 years. The rapid growth that many developing countries experienced prior to the crisis was largely the result of the same model. Countries in sub-Saharan Africa, in particular, were propelled forward by the growing demand for their natural resources from other countries — China chief among them.

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