It's Time To End Asia's 30 Year Free RideRudi Dornbusch
Year in, year out, Asia runs large trade surpluses with the U.S. For economists, trade deficits are just a mirror of domestic saving and investment behavior: Countries that save more than they invest have trade surpluses. If Asians save massively, envy them--and emulate them if you can. A different account of why they have surpluses holds that Asia--and especially Japan--is closed, while the U.S. is not. Our trade deficits would then mirror the tilted playing field. A third version places the blame on a large gap in quality, worker skills, management, and technology: Asia has it all, and we have been slipping. There is room for yet another view: Asia's currencies are chronically undervalued, and that has given them the edge.
Each perspective is right, and each must be part of the response to our poor trade performance and high unemployment. A major currency realignment, especially, offers a positive move to avert protectionism, boost U.S. growth, and at the same time, shift Asia's surpluses toward support of the postcommunist transformation now under way in the Asian region.
Throughout the postwar period, until 1970, European currencies were pegged to the dollar. Inflation rates were not very different here and there, but economic progress was. With high rates of productivity growth, more than twice our own, Europe reconstructed and caught up in manufacturing. Unchanging currencies helped translate improved productivity into substantial gains in competitiveness and export-led growth. Europe knew it had a good thing going: Repeated pleas from the U.S. for realignments went unheeded. Only with the transition to floating, in 1970-73, did the great European currency appreciation come. When Europe's currencies rose across the board by some 30%, U.S. producers got a shot at competing in world markets on an equal footing for the first time in more than a decade.
BURNING RUBBER. We face the same issue with Asia today. Export-led growth has been the rule for the region, while trade surpluses have become a way of life with the U.S. For more than three decades, Asia has been racking up record growth of productivity and output. In the past 30 years the region has averaged 6% growth per year. Even if a policy of currency undervaluation is only part of the story, it has helped to promote that strong performance. Now, Asia should accept a major appreciation of its currencies, just as Europe did in the early 1970s. From Hong Kong, China, and Thailand to Korea and Japan, currencies across the board should rise by some 30% against the dollar. This need not happen in a single year or two, but it must be the agenda for not long after that.
Currency realignment is only part of the comprehensive package of reform that's needed. Abroad, markets must become more open. That is particularly the case in Japan. In 1852, Peter Parley commented on Japan's unwillingness to trade with non-Japanese. "Except the eleven individuals of the Dutch factory...no foreigners can obtain any intercourse with Japan. A strange vessel approaching the coast is fired upon, and, if driven into a harbor by stress of weather, she is ordered off as soon as possible."
CARROT AND STICK. Nowadays, at least Japan exports, so things have improved some. Yet its non-oil imports today represent a far smaller share of income than they did two or three decades ago. Anywhere else, the opposite is true--for example, in Germany. In manufacturing, the story is even worse. Japan's import penetration is the same 3% of gross national product that it was in the 1960s. Currency realignment will take away some of the strain, but it cannot be a substitute for more open markets in goods and services.
On our side, too, currency realignment is no panacea. We need to upgrade education, skills, investment, and technology. We need deep budget cuts to raise the national savings rate, lower credit costs, and raise capital formation. Currency realignment and low interest rates assure that budget cuts represent a strategy for growth rather than a prescription for unemployment.
This is a good time for a big realignment. Just as Germany's unification led to appreciation of the mark under the pressure of strong demand, Asia is increasingly facing the same prospect. Currency appreciation rather than overheating is appropriate. In Asia, coastal China, Vietnam, North Korea, and Siberia are all joining the world economy, so the Asian super-exporters can shift their surpluses and their lending to the unification projects in their own region: These huge markets need goods and money, and these exporters have both. Let them target emerging economies--and let the U.S. off the hook.
On our side, where budget cuts will soften labor markets even further, currency depreciation is part of the cure. The U.S. may be addicted to Asia's goods and loans, but we have to learn to pay our own way, and a good shot of competitiveness evens the playing field. Those who oppose currency realignment, preferring education alone, are dreamers. It will take a decade or more to make these improvements, and the U.S. hasn't even started.