In this blog post, I stated that the controlled conflict between the US and China over the relative value of their respective currencies was worthy of looking at again. While it is now common wisdom that the Chinese currency is undervalued, I confirmed even then that competitive devaluation cannot be a long term development strategy for facilitating exports. Annie Lowrey of Slate Magazine writes here that many ministers of finance are beginning to feel that any adjustment in other currencies, the Yuan aside, will have adverse effects on their ability to make exports.
Looking at the arguments that are resented in that piece, the concern for competitive devaluation is that it is a strategy that is open to any nation. As a result, a full scale adoption of currency devaluation as a way to facilitate more exports cannot work in the long term.
This state of affairs also exposes the fact that export-driven growth is a proven development strategy but the pursuit of the strategy can create imbalances since one's country's exports must result in imports by a counterpart. The big lesson in my view is not only that currency manipulation can only work for some time before it faces competition by competing nations, but also that every economy needs a fair balance between consumption and exports. But that is easier said than done because mercantilism is instinctively attractive to many nations.
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