Chinas trade balance is on course for another bumper surplus this year.

Meanwhile, concern about the health of the US 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 Congressional hearings on the renminbi to be held in September, where
many voices will urge the Obama administration to threaten punitive measures if
China does not act.
Discussion of Chinas currency focuses around the need to shrink the countrys
trade surplus and correct global macroeconomic imbalances. With a less
competitive currency, many analysts hope, 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 renminbi is viewed largely as a US-China issue, and the
interests of poor countries get scarcely a hearing, even in multilateral fora. Yet a
noticeable rise in the renminbis value may have significant implications for
developing countries. Whether they stand to gain or lose from a renminbi
revaluation, however, is hotly contested.
On one side stands Arvind Subramanian, from the Peterson Institute and the
Center for Global Development. He argues that developing countries have
suffered greatly from Chinas 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 renminbi 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. Hence, Subramanian argues, poor countries must make
common cause with the US and other advanced economies in pressuring China
to alter its currency policies.
On the other side stand Helmut Reisen and his colleagues at the OECDs
Development Centre, who conclude that developing countries, and especially the
poorest among them, would be hurt if the renminbi were to rise sharply. Their
reasoning is that currency appreciation would almost certainly slow Chinas
growth, and that anything does that must be bad news for other poor countries
as well.
They buttress their argument with empirical work that suggests that growth in
developing countries has become progressively more dependent on Chinas
economic performance. They estimate that a slowdown of one percentage point
in Chinas annual growth rate would reduce low-income countries growth rates
by 0.3 percentage points almost a third as much.
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, most
sustainable growth model for low-income countries?
Historically, poor regions of the world have often relied on what is called a ventfor-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 nineteenth 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.
But this model suffers from two fatal weaknesses. First, it depends heavily on
rapid growth in foreign demand. When such demand falters, developing
countries find themselves with collapsing export prices, and, too often, a
protracted domestic crisis. Second, it does not stimulate economic
diversification. Economies hooked on this model find themselves excessively
specialized in primary products that promise little productivity growth.
Indeed, the central challenge of economic development is not foreign demand,
but domestic structural change. The problem for poor countries is that they are
not producing the right kinds of goods. They need to restructure away from
traditional primary products to higher-productivity activities, mainly
manufactures and modern services.
The real exchange rate is of paramount importance here, as it determines the
competitiveness and profitability of modern tradable activities. When developing
nations are forced into overvalued currencies, entrepreneurship and investment
in those activities are depressed.
From this perspective, Chinas currency policies not only undercut the
competitiveness of African and other poor regions industries; they also
undermine those regions fundamental growth engines. What poor nations get
out of Chinese mercantilism is, at best, temporary growth of the wrong kind.
Lest we blame China too much, though, we should remember that there is little
that prevents developing countries from replicating the essentials of the Chinese
model. They, too, could have used their exchange rates more actively in order to
stimulate industrialization and growth. True, all countries in the world cannot
simultaneously undervalue their currencies. But poor nations could have shifted
the burden onto rich countries, where, economic logic suggests, it ought to be
placed.
Instead, too many developing countries have allowed their currencies to become
overvalued, relying on booming commodity demand or financial inflows. And
they have made little systematic use of explicit industrial policies that could act
as a substitute for undervaluation.
Given this, perhaps we should not hold China responsible for taking care of its
own economic interests, even if it has aggravated in the process the costs of
other countries misguided currency policies.

ROMANA
What truly is logic? Who decides reason? My quest has taken me to the physical,
the metaphysical, the delusional, and back. I have made the most important
discovery of my career - the most important discovery of my life. It is only in the
mysterious equations of love that any logic or reasons can be found.