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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: epicure who wrote (113394)	8/29/2003 10:25:26 PM
From: stockman_scott	Read Replies (1) \| Respond to of 281500

Global: The Politics of Globalization By Stephen Roach (New York) Morgan Stanley Aug 29, 2003 Economic weakness and politics often make for strange bedfellows. This could be one of those times. The political season is now starting to heat up in the United States, and all eyes are on the stresses and strains of America’s jobless recovery. As US Treasury Secretary John Snow heads off to Asia, that issue will be uppermost in framing America’s message to the rest of the world. The politics of globalization are coming to a slow boil. China is the tension point du jour. The vigor of the Chinese growth dynamic -- with industrial production surging at a 16.5% y-o-y rate in July 2003 -- stands in sharp contrast to relatively stagnant output in the developed world. High and rising unemployment in wealthy developed countries has politicized the impact of “the China factor.” So has China’s currency regime -- a renminbi peg that is fixed to the US dollar. That’s where the story gets complicated. America’s gaping current-account deficit screams out for a weaker dollar, in my view. Consequently, to the extent such an outcome comes to pass -- and that’s what now appears to be under way -- the Chinese currency will also weaken. That would provide the world’s fastest-growing economy with a favorable break in relative prices and competitiveness that many believe would exacerbate the job conundrum in the industrial world. It’s at this point where the blame-game of globalization comes into play. Hard-pressed workers and their political allies in wealthy industrial nations have come to believe that China is the source of their problems. The only way out, they argue, is for China to give in and change its currency. Either a one-off revaluation or a shift to a floating exchange rate regime would be acceptable, we believe. That would at least keep the playing field level, goes the argument -- enabling the high-cost developed world to hold its own against a rapidly developing Chinese economy. As in all such disputes, there’s another side to this story. The vigor of the Chinese economy may not be what it appears to be on the surface. The nation’s export-led growth dynamic is, after all, largely a by-product of aggressive outsourcing strategies of multinational corporations. While Chinese exports have tripled over the past decade, fully 65% of that increase is traceable to exports of “foreign-invested enterprises” -- Chinese subsidiaries of multinationals and Chinese partners of foreign joint ventures. With China now the world’s largest recipient of foreign direct investment -- attracting some US$52 billion in 2002 -- such outsourcing seems destined to increase in the years ahead. These corporate strategies have little to do with currency. They are more a reflection of the conscious efforts of high-cost companies in the wealthy industrial world to seek new efficiencies from state-of-the-art, low-cost production platforms in developing countries such as China. In tough economic times, politicians have little choice but to take sides in this contentious debate. In America, pro-labor Democrats have lined up solidly against China -- leading the charge in bringing the currency debate to a head. China, according to this argument, is guilty of a currency manipulation that has led to a hollowing out of Smokestack America and a concomitant loss of jobs. This view has also gained political sympathy in Japan and Europe. The Bush administration prefers to tackle the perils of a jobless recovery through different means -- relying more on the traditional tools of fiscal and monetary stimulus. Yet the Republicans can hardly afford to ignore the China factor. Secretary Snow’s mission to Asia obviously comes at a delicate time in both the business and the political cycles. The more conviction the Republicans have in the vigor of US recovery, the more likely they will refrain from putting pressure on China, in my view. That means the recent strength of the US data flow could well have a critical bearing on defusing tensions at upcoming discussions in Beijing and pushing the currency issue to the back burner. Alas, it is important to remember that the US Treasury Secretary is not just going to China on his upcoming sojourn. His first stop actually will be Tokyo, where he comes face to face with yet another strain of currency manipulation. Indeed, in order to prevent a market-induced strengthening of the yen, Japanese authorities have spent about US$75 billion on official currency intervention in the first seven months of this year. To the extent the US and the rest of the international community condones such actions, the incentive for Japanese reforms may well be diminished. Unlike China, where there is a steadfast commitment to reforms, in Japan there is a very explicit trade-off between reforms and foreign exchange rates. I remember full well the sheer sense of panic that gripped Japan Inc. in the spring of 1995 when the yen/dollar cross rate hit ¥80. The Japanese recognized at the time that radical reforms were the only way to cope with a super-strong currency. But in the end, the world flinched and allowed the yen to depreciate by some 45% versus the dollar over the next three years or so. And Japan never really lifted a finger on reform. That’s a lesson that should not be lost on Mr. Snow as the he contemplates the implications of Japan’s massive currency intervention in 2003. Japan’s line of reasoning is that its economy is too weak to tolerate a stronger currency. But to the extent that currency manipulation forestalls long overdue progress on the Japanese reform front, then there is good reason to question the wisdom of such tactics. Of course, it’s always a delicate matter offering advice -- economic or otherwise -- to nations around the world. But like it or not, countries that manipulate the relative prices of foreign exchange rates in order to suit their own purposes are explicitly bringing others into the equation. From the standpoint of the US, that means the Japanese authorities are, in effect, short-circuiting a depreciation of the dollar that would otherwise be the inevitable by-product of a classic current-account adjustment. From the standpoint of Europe, Japanese currency manipulation could well force a disproportionate share of the dollar adjustment on the euro. In other words, US Treasury Secretary Snow has ample justification, in my opinion, in raising serious questions about the global costs and benefits of Japan’s aggressive currency intervention efforts. In my view, the politics of debating the currency issue with Japan are just as compelling as they are with China. To do otherwise and single out China would be sending the wrong message, I believe. Over the years, I have learned the most about Asia when I hop directly between Beijing and Tokyo. The same opportunity now awaits Secretary Snow. I hope he will be able to step back and appreciate the extraordinary contrasts between Japan and China. A post-bubble Japanese economy has been in a period of relative stagnation for nearly a dozen years -- with real GDP growth averaging only 1.1% from 1992 to 2002; over the same period, China’s real GDP growth has averaged about 10%. Yet as the second-largest economy in the world, Japan’s per capita national income was still some 40 times that of China at market exchange rates in 2001 (or 6.5 times that of China on a purchasing power parity basis). Notwithstanding this dramatic disparity in living standards, there can be no mistaking the shift in the pendulum of economic power in Asia. China remains unflinching in terms of its commitment to reform and structural change. By contrast, I believe Japan has taken the concept of inertia to a new level. It would be tragic if the political cycle came down hardest on the economy that is playing the greatest role in reshaping the world. Yet that’s precisely the risk as the politics of globalization now come into play. morganstanley.com