Guest Contribution: Dani Rodrik on China’s Fat Trade Surplus
This morning, the International Monetary Fund advised China and other countries with huge trade surpluses that they can slash those surpluses without sacrificing economic progression by adopting a toolkit of measures including revaluing their currencies, shifting policies toward domestic consumption and pursuing more sophisticated markets. The IMF report, part of its semi-once a year World Economic Outlook, frequently cites the work of Harvard economist Dani Rodrik in reaching its conclusion.
Here?s Mr. Rodrik?s thoughts, e-mailed to the Wall Street Journal?s Bob Davis:
The honest conclusion from this chapter, which is a useful exercise, is not that currency appreciation will not have adverse effects on progression, but that it will not necessarily have adverse effects. Furthermore, many of the findings in the chapter would be cause for concern for China: a negative progression effect is more likely the quicker the initial progression, the larger the initial current tab surplus, and the higher the initial saving rate. China is an outlier in all these respects.
In addition, the chapter largely overlooks another vital determinant of the appreciation’s impact. The poorer the economy, the more detrimental is a real appreciation likely to be. Nearly all of the comparison economies considered here were significantly richer than China at the time of their currency adjustment. The poorest economy in the case studies (Korea in 1989) was between twice and three era richer than China is at present (depending on whether you compare them in regular dollars or PPP dollars).
This matters because China still has a huge surplus of labor that needs to be absorbed into its modern, mostly tradable, sectors. As the authors document, the tradable sector tends to grow significantly less rapidly following appreciation. This is not excellent news for an economy at China’s level of development.
In my own work, which they cite, I really find that the sensitivity of China’s progression to its exchange rate is quite a bit higher than for other countries at similar returns levels. This is maybe because China is so huge and with so much labor still in extremely low productivity activities.
So the bottom line from this analysis should be “not full speed yet to be,” but “caution is warranted.”