Paul Van Den Noord (London - Dec 2010)

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Paul Van Den Noord (London - Dec 2010)

  1. 1. Paul Van Den NoordChina is running a large current account surplus and the US an equivalent deficit. US lobbiesthink nominal appreciation of the Chinese currency vis-a-vis the US dollar will resolve this.However, what matters for rebalancing is real, not nominal, appreciation of the Chinese currencyand this is driven by economic fundamentals, not exchange rate policy. The fact that realappreciation is slow in China must serve an economic purpose, which is that China is in atransition from a rural to an industrial economy and needs to absorb massive labour supply. Atthe early stages of development of the Chinese economy domestic demand could not be theengine, but exports could. This requires strong competitiveness and is underpinned by a flatPhilips curve associated with abundant labour supply. The low real exchange rate serves thesame role as the “infant industries” industrial policies in advanced economies in the past.That said, as the Chinese economy matures, a shift to domestic demand will (have to) occur andthis will involve a real appreciation of the exchange rate. This must, however, be an orderlyprocess. Nobody is served by a run on the dollar (although it might happen) and nobody is servedeither by outright protectionism. Instead what is needed is a set of coherent structural policies thataccommodates and facilitates the adjustment. This means that structural policies in China (and insome other emerging economies running current account surpluses) should be focused oncreating better social safety so as to reduce the incentives for (excessive) saving, and to developits financial markets so that it would be less in need of the US to act as their banker. Structuralpolicies in the US should, in contrast, be targeted at easing the incentives for dis-saving built intothe tax system ( such as the mortgage interest deduction). Also in Europe imbalances are seriousand require appropriate structural policy responses – not least since in the euro area nominalexchange rate adjustment is not a (realistic) option in the first place.The OECD sees it as its role to promote such structural policies, notably in the framework of theG20 deliberations. We hope to demonstrate (see attached PowerPoint, parts of which I may ormay not use, dependent on the time available) that such policies can hit three birds with onestone, i.e. to raise growth prospects in advanced countries, facilitate fiscal consolidation in thesecountries and ease the global imbalances. Whenever there are important spillover effects ofpolicy (positive or negative), there is a role for international organizations, and in this case theOECD is, in our view, particularly well placed.

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