The buried lead on China's currency evaluation
■"What Comes After 'Bretton Woods II,'" op-ed by John B. Taylor, Wall Street Journal, 15 August 2005, p. A12.
Good piece worth reading in full. Gist: economists had dubbed the ten year period in which China had kept its currency pegged to the dollar "Bretton Woods II," calling to mind the period from 1945 (or thereabouts) to 1971 in which the world's major currencies were similar pegged, with the basis back then being gold (as in, the gold standard). In effect, the emerging markets of Developing Asia had, by and large, replicated the same sort of currency stabilization strategy that America used in its post-WWII resurrection of the West (better to peg than to float).
Most economies there had, by now, moved off strict pegs and allow some level of controlled float. With China joining that dynamic, the synchronization of Asia's internal economic rule sets with the global economy's growing rule set will be accelerated.
In many ways, this is a real tipping point in Asia's progressive integration with globalization's more mature Functioning Core of the West. In effect, Asia reached the point of diminishing returns with that pegged strategy, meaning it achieved a level of economic development in which more control is to be had through allowing the currency to float than keeping it fixed, presuming the economy has the necessary institutions needed to offset that float dynamic. Done well, your economy will self-correct better, avoiding either overheating or hard landings.
China keeping its currency pegged to the dollar was a huge stabilizing factor in the global economy across the past decade, helping Asia survive the 97-98 flu in tact. Now that this stabilizing element is gone, the question is, does the Core enter into a new period?
Undoubtedly yes, but one that can be managed effectively if the U.S. and China begin to recognize their natural strategic alliance across this century.
The Bush Administration did a nice quiet job of making this change possible on China's side. Will it be able to manage a host of other similarly hard transitions that China must make in coming months and years? Or will the China bashers be allowed to run amok over whatever event strikes their fancy?
Tonight I sit in on meeting regarding another potential new strand of commercial connectivity between China and the US: private-sector driven and yet chock full of potential public-sector angst, despite the obvious logic in its unfolding. This is a dynamic we will see again and again on China: natural economic bonds emerging but political understanding lacking, thus the fear-threat reaction that-OMYGOD!-this connectivity "must" represent some new "threat" to America's standing in the world.
Sad to say, but we will have to survive the current generation of political and military leadership on this issue. The good news is, whenever a party assumes the White House, the leaders tend to be pretty darn reasonable in their judgments (Clinton bashed as candidate and then got wiser, Bush does similarly). Same, of course, cannot be said about the Hill or the Pentagon, where the turnover of the entrenched elites is quite low, and thus quite slow to respond to changes in the strategic landscape.
But give credit where credit is due: Bush and John Snow did a nice, quiet job of pushing the Chinese down this pathway-just in time. The optimist in me says such persistence will work with the Chinese on a host of seemingly more difficult issues.