|The International Herald Tribune | www.iht.com
Commentary: Asia can't devalue its way to prosperity
William Pesek Jr. Bloomberg News
Thursday, July 10, 2003
SINGAPORE Asia is wondering if it has a new crisis on its hands - the
flipside of the turmoil in 1997. This time, it is not plunging currencies
that are causing trouble, but rising ones.
Ironic, isn't it? Policymakers are scrambling to halt increases in their
currencies. And investors have been conditioned by governments to believe
that rising currencies are bad, while sliding ones are good because they
bolster exports and create jobs.
It is time that Asia scrapped such thinking. It has honed its
devalue-your-way-to-prosperity strategy since the 1997 crisis, one that is
championed by the region's biggest economy, Japan. But the approach hurts
Asia's growth outlook for three reasons.
First, it distracts economies from fixing their real problems. Second, it
limits the amount of foreign capital they attract. And third, it delays
the correction of one of the world's most dangerous economic imbalances:
the gaping U.S. current account deficit.
"If a weak currency really were good in the long run, Latin America's
economies would be booming," says Marc Faber, managing director of Marc
Faber Limited and an investor in Asia for more than 20 years. "Asia should
move beyond all this."
The appeal of manipulating exchange rates is understandable. It is the
most painless way to stabilize an economy. Asian tourists visiting New
York may not like that their money buys less, but governments here see it
as a necessary evil to stay competitive. By using a currency's value as
the primary shock absorber, countries are hiding the cracks in their
economies, not fixing them.
Take Singapore. Its central bank on Thursday signaled that it would accept
a weaker currency to bolster growth in an economy that shrank 4.3 percent
in the second quarter. It reset its target trading band for the Singapore
dollar to around current levels, a move that represents an implicit easing
of monetary policy. That is fine for now, but Singapore really needs to
reinvent its economy.
Or, take Japan. With unemployment near a record high, corporate
bankruptcies and deflation, Tokyo is relying on a weak yen as never
before. The trouble is, a weak yen means banks can take more time
disposing of bad loans and deadbeat companies can continue to operate.
Asian economies have been too distracted to tackle long-range challenges.
Now that the region's currencies are rising versus the dollar, governments
may regret not doing more to shore up banking systems, reduce bad loans
and increase competition.
The Indonesian rupiah, for example, is up more than 9 percent against the
U.S. currency this year. The Indian rupee and Thai baht, meanwhile, are up
3.84 percent and 3.48 percent, respectively. The currencies of Pakistan,
the Philippines, South Korea and Taiwan also are up this year.
Rather than fighting the trend, policymakers should let it play out. In
the age of globalization, capital flows brought in by a strong currency
can be more important than the increased trade afforded by a weaker one.
Countries require capital to support stock markets that are playing
unprecedented roles in economies. Foreign capital is needed to hold down
interest rates, too. That is good for growth and helps companies raise
money in the bond market instead of borrowing from banks.
A strong currency also keeps inflation under wraps, allowing central banks
to keep interest rates low. While deflation is getting all the attention
these days, countries such as Indonesia, South Korea and the Philippines
are, to varying degrees, grappling with inflation risks.
Of course, there are some economies being held back by overvalued
currencies. Hong Kong continues to sink under the weight of its currency's
fixed peg to the dollar. While policymakers like the stability it affords
the economy, Hong Kong's growth is suffering, as are its markets.
China's currency is a far more pressing issue for Asia; it is almost
universally thought to be weaker than it should be. More and more
manufacturers around the globe are complaining that China's currency is
giving it an unfair advantage. The situation has given rise to speculation
about a deal to strengthen the yuan's value.
There are few convincing arguments for weaker exchange rates in Asia. In
fact, Asia's penchant for devaluing currencies may be delaying a necessary
adjustment in global markets.
Unless the dollar weakens, the U.S. current account deficit - already more
than 5 percent of the economy - may continue to widen. That means the
imbalance will only get bigger.
Of course, the United States may also be going the beggar-thy-neighbor
route. The Treasury Department has left little doubt that it is
comfortable with the dollar's 7.48 percent drop versus the euro this year.
If U.S. growth doesn't pick up soon, the Bush administration may opt for a
more activist approach, talking the dollar down even further.
Asia is faced with an end-justifies-the-means situation. While Asians
bristle at the idea of the world's largest economy devaluing its way
toward prosperity, Asia's fortunes are still closely tied to those of the
If U.S. growth booms and its consumers buy more Asian goods, wouldn't it
be worth the short-term pain of a stronger local currency?
Unfortunately, Asia is still obsessed with exchange rates. It is a
preoccupation that makes little sense in the short run and even less in
the long run.