Economic Finger Trap
Dani Rodrik on the Chinese trade imbalance vice grip:
So we are left, it seems, with two equally unappetizing options. China can maintain its currency practices, but at the risk of large global macroeconomic imbalances and a major political backlash in the US and elsewhere. Or it can let its currency appreciate, at the risk of inducing a growth slowdown and political and social unrest at home. It is not clear that advocates of this option have fully comprehended its potentially severe adverse consequences.
There is, of course, a third path, but it would require re-writing the WTO’s rules. If China were allowed a free hand with industrial policies, it could promote manufactures directly while allowing the renminbi to appreciate. This way the increased demand for its industrial output would come from domestic rather than foreign consumers.
It is not a pretty solution, but it is the only one. The great advantage of industrial policies is that they enable growth-promoting structural change without generating trade surpluses. They are the only way to reconcile China’s continued need for industrialization with the world economy’s requirement of lower current-account imbalances.
Rodrik is one of the few sane voices left on globalization. His interest is (rightly) in the area of development: human, social, economic, and political. Markets are a means to that end and not an end in themselves, something that’s described brilliantly in his book, One Economics, Many Recipes (highly recommended).
What he points to here with respect to the WTO and here criticizing the IMF for opposing a sane policy of (tempered) capital controls on “hot money” flows (A policy I’ve long supported) is that countries along a developmental path have different needs which are best served by different policies. Trans-national governing entities from fully modernized countries intent on replicating the rules and practices of those countries do not help emerging economies. Instead, they’ve created the current damned if you do, damned if you don’t conundrum Rodrik brilliantly summarizes.
Lest I immediately hear howls about capital controls, it’s worth keeping in mind that in the wake of the financial crisis, we now have a system of capital bailouts. The capital “control” lies with the banking and financial sectors and with the governments subservient to them. See, for example, the positive response from the stock market after news surfaced of an impending bailout in Greece.
Absent capital controls, we have what Thomas Friedman called the electronic herd, which is by the way a perfect metaphor. It’s just that Friedman saw no way to slow down or even impede/corral the herd and therefore argued we should just submit to its whims and welcome our new financial overlords (complete with breathless utopian talk of flattening worlds and all the rest).
Now that herd runs rampant through the field, eats all the local grass, leaves the land stripped, confident in the knowledge that it will get “bailed out” (whatever that means at this point). In other words, the electronic herd has become a non-ecological herd, without a niche and competing/countervailing forces to keep it in check. Those checks are what need to be restored.