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The Falling Dollar and Developing country Exports

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Thursday, 11 November 2010 05:44

The Washington Post notes that the Fed's new round of quantitative easing will:

"harm exports from developing countries. That's because steps to lower U.S. interest rates and put money into the economy have the effect of making other countries' currencies more expensive."

If world imbalances are going to be addressed, then developing country exports must be hurt. In economic theory, rich countries like the United States are supposed to have trade surpluses. This means that they export capital developing countries. The logic of this pattern of trade is that capital commands a higher rate of return in fast growing developing countries in which it is relatively scarce.

There were in fact substantial flows of capital from rich countries to poor countries prior to the East Asian financial crisis in 1997. However, the harsh treatment of countries in the region by the I.M.F. led developing countries throughout the world to focus on accumulating vast amounts of reserves in order to avoid ever being in the same situation. This meant that developing countries had to run export surpluses with the United States and other wealthy countries.

In effect, the I.M.F, under the guidance of the Rubin-Summers Treasury Department, put in place a dysfunctional system that would inevitably explode. The effort to re-balance trade is about reversing those policies.

Comments (8)Add Comment
Only Stupid Liberals Believe in "Balance"
written by izzatzo, November 11, 2010 6:20
If world imbalances are going to be addressed, then developing country exports must be hurt.


What's with the balance thing? Since when does comparative advantage between countries require "balance"? Is a 100 ton of bananas traded for 20 tons of steel in "balance"?

Let the free market decide what's in balance. Keep the government out of it. Manipulating exchange rates does nothing because like manipulating supply prices, consumers just go around them to other suppliers.

Glen Beck is correct. Liberals like Dean Baker want to hurt developing countries.
I think you are missing something in your analysis
written by Jehu, November 11, 2010 7:12
I am afraid the opposite is true: quantitative easing will not hurt developing country exports. Your economic theory leaves out the fact that the US dollar is world reserve currency. Hence, the "weaker" the dollar, the larger the quantity of dollars needed by other countries.

Which is to say, by "weakening the dollar" the US can drive up prices for all countries no matter their national currency. The US's position in this matter is unique, so it is often overlooked in analysis.

What my analysis shows is that the US will not end up with a weaker currency but rather one that will remain significantly overvalued no matter how much QE the US unleashes.
Sweet!
written by PeakVT, November 11, 2010 7:31
What my analysis shows is that the US will not end up with a weaker currency but rather one that will remain significantly overvalued no matter how much QE the US unleashes.

If that's true, the Fed should monetize every single cent of the US government's publicly-held debt tomorrow.
...
written by liberal, November 11, 2010 8:18
PeakVT wrote,
[blockquote]
If that's true, the Fed should monetize every single cent of the US government's publicly-held debt tomorrow.
[/blockquote]

Heh.
...
written by Mark, November 11, 2010 10:02
"In effect, the I.M.F, under the guidance of the Rubin-Summers Treasury Department, put in place a dysfunctional system that would inevitably explode. The effort to re-balance trade is about reversing those policies."

You forgot to add Timmy Geithner to the Rubin-Summers Treasury Department and therein lies the rub. Obama's appointment of Summers and Geithner is clearly a continuation of these policies that caused the problems in the first place. Not only that, it was Summers who told the Asians post- Asian crisis to "save banking, not banks." What did Summers-Geithner-Obama do in response to the US financial crisis? They saved banks, not banking.

The hypocrisy of failed US policies and individuals is thick and clearly evident to the entire world.
Seems to be some nonsense here.
written by Aditya, November 11, 2010 10:36
1) Nobody has to play by the IMFs rules. You make it sound like the IMF is above the sovereignty of the member nations, which is nonsense. If countries are accumulating reserves, that is their choice. And why do YOU assume the old reserve guidelines were better?

2) What are you talking about that capital isn't flowing from rich nations to poor nations? Maybe you don't invest in other countries, but I sure do. Let's see some numbers Dean, because I am extremely skeptical that there aren't hundreds of billions of American dollars invested in foreign economies.

3) Additionally, the whole premise that capital flows to poor countries is nonsense. Capital flows to where it gets the best expected value -- which is a function of BOTH the return AND the risk. Note that the return is a function of GROWTH, not how poorly capitalized the country is. So it is unsurprising to me that money flows from Italy to the US instead of vice versa. The US might have more capital (per capita), but the US also has more growth.

Whereas in China and India and Brazil etc., our money is indeed flowing there since there is high enough growth to entice investors.

Liberals turn jingoistic when it comes to trade
written by Emin Orhan, November 11, 2010 2:30
"If world imbalances are going to be addressed, then developing country exports must be hurt."

Countries like Brazil, Turkey, Colombia and South Africa already have hugely overvalued currencies, and this is adversely effecting their industrial base. Are you suggesting crippling their industrial production even more, just so the US can export more? That doesn't sound like a reasonable development strategy for a developing country.

Second your suggestion that capital inflows (especially short-term inflows) to developing countries do anything productive or useful in those countries is just absurd. Just ask any developed country how its economy developed in the first place: by freely welcoming such flows or by restricting them?

It's funny to see how liberal economists like you and Krugman turn jingoistic when it comes to trade.
...
written by term papers, November 12, 2010 2:38
hey there guys, don't you think that some new objects will be so much ore in use over here as wellnat

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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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