The decision of China’s policy makers to tweak the exchange rate of the country against the dollar leads to several reactions across the different global economies. This event occurred in August which started off a chain reaction of uncertainties in the global market and reactions in the currency market as well.
Many might wonder whether the currency war is the solution to all problems. Those who define the policies that influence the global economy seem to think that keeping the currency weak is the only way to propel the global economy forward. This was one of the overall findings that emerged from the discussions held at the bi annual meeting of the International Monetary Fund which was held in Peru recently.
Findings that raise concern are:
- The policy makers agreed that if an exchange rate is deprecated around ten percent, that will lead to a rise in exports and export related earnings, which will help to add on about 1.5 percent to the output of an economy.
- The re-evaluation of the renminbi of China was not around ten percent, but the weakening of the rate by three percent seemed to have a large effect on the global economy. However, this step that the China’s policy makers took was one of the biggest ones that has been taken over twenty years.
- The cut of the exchange rate by China was seen as a move that will force the corresponding and neighboring economies to retaliate so that they can boost a sagging growth rate.
- It is a known principle in economies that when a currency rate is devalued it is in an attempt to make its goods seem cheaper and more attractive to foreign buyers. When an economy’s growth rate is flagging, it is a great step to boost the GDP of an economy.
There is no denying the evidences shown by history where exchange rates have been made weak by developing nations in order to make their goods and services seem more competitive. It also helps to protect the shares of export in the global economy as one can undercut rival countries and exporters.
Debate on the way forward
For IMF, it has always been a focus on the reform of tax policies, ways to boost investment and freeing up markets of labor across the world. However, in this particular scenario, as pointed out in the article called Policy Makers are Confused about the Way Forward, the stuttering signs of the economy might not be resolved by simply making the exchange rates weaker. Most policy makers feel that it is a way of seeking easier alternatives to structural reforms that certain economies need. These reforms will come by when the right directives are given so that investment is boosted in the economies which will propel the demand cycle globally. This is also in accordance of the World Bank’s report, which goes against the weakening of the currency rates as it feels that the current global economic state of affairs will not be helped by this kind of a situation.