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Home Publications Blogs Beat the Press Currency Wars: Developing Countries Are Supposed to Be Borrowers

Currency Wars: Developing Countries Are Supposed to Be Borrowers

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Thursday, 21 October 2010 05:07

The NYT had a piece on the recent decline in the value of the dollar and effort by other countries to offset its impact. The article noted in particular developing country efforts to reduce capital inflows that are raising the value of their currency.

It would have been worth noting that in standard economic theory, developing countries are supposed to be borrowers. The logic is that capital is relatively scarce in the developing countries, which means that it gets a higher return. Capital therefore should flow from relatively to slow growing rich countries to more rapidly growing developing countries.

This was the direction of flows until the East Asian financial crisis in 1997. The harsh conditions that the IMF imposed on the East Asian countries led developing countries throughout the world to focus on building up reserves so that they would not have to deal with the IMF. This reversal coincided with the "high dollar" policy touted by then Treasury Secretary Robert Rubin. It helped to lay the basis for the imbalances associated with the stock and housing bubbles.

To a large extent, the decline in the value of the dollar would effectively reverse the distortions to the world economy resulting from the IMF-Rubin policy of the late 90s. It is also worth noting the recent decline in the dollar is largely just reversing its run-up as a result of the financial crisis in 2008. Money flowed into the U.S. as a safe haven, pushing the dollar well above its pre-crisis levels. It is now falling back toward the level it was at before the crisis.

Comments (3)Add Comment
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written by purple, October 21, 2010 7:44
Most people have forgotten about the consequences of 97-98, but historically it extremely consequential. Evey leader is Asia remembers the humiliation of Suharto (who was a scumbag, but a golden boy of the West for decades).
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written by purple, October 21, 2010 7:45
in Asia..
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written by izzatzo, October 21, 2010 8:44
The logic is that capital is relatively scarce in the developing countries, which means that it gets a higher return.


In the good old days when scarce resources earned their true worth, the USA was global capital lender of last resort to everyone else.

Then along came Communist Commander Clinton with Rogue Robert Rubin at his side and turned it all upside down, converting the USA to a Beaten Beggar Borrower that ultimately resulted in the Great Recession.

Stop the carnage. Elect a Teabagger today, the only ones who understand this conspiracy. As Ginni Thomas would say, the rest of you owe us an apology for what you did to us.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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