Opinion Blaming China doesnt help
Asia turns back to currency intervention. Should the US let ideology leave it behind?
It is a safe bet that Asian currency intervention was not on the minds of Republican primary voters in Delaware this month when they selected a Tea Party favourite,Christine ODonnell,as their Senate candidate. But the pendulum swings in American politics are a key concern of Wen Jiabao and Naoto Kan,the prime ministers of China and Japan,respectively,who both met with President Obama in New York on Thursday,with the loss of American jobs to Asian competition high on the agenda.
The Asian nations interest in American politics stems not just from Americas standing as the sole global superpower,but also from a growing belief among Asian leaders that the era of United States hegemony will soon be over.
What does this sweeping statement have to do with the price of yen? Plenty. On September 15,the yen dropped sharply against the dollar,improving the competitiveness of Japanese exporters. After a brief bounce last week,expect the downward trend to continue. Kans government has decided to follow the lead of China and other Asian nations in managing (some critics would say manipulating) its currency; it spent a record $23 billion in a single day on foreign exchanges the largest such intervention ever instead of leaving the yens value entirely to market forces.
In Asian politics,what you see is often the opposite of what you get. On September 14,Kan,generally seen as favouring free markets,held on to his job in an intra-party election after a bitter challenge from his rival Ichiro Ozawa,who had loudly demanded a Chinese-style policy of currency intervention to keep the value of the yen low. It turns out,however,that Kan,in winning the election,may have tacitly ceded control of economic policy to Ozawa. Hence the ensuing sell-off of the yen.
The decision to break with free-market ideology and spend government money to control the yens value against the dollar was mainly driven by Japans relationship with China,not America.
Japans action suggests that,in the aftermath of the recent financial crisis,the dominance of free-market thinking in international economic management is over. Washington must understand this,or find itself constantly outmanoeuvered in dealings with the rest of the world.
The fact is that the rules of global capitalism have changed irrevocably since Lehman Brothers collapsed two years ago and if the United States refuses to accept this,it will find its global leadership slipping away.
In this climate,the market fundamentalism now represented by the Tea Party,based on instinctive aversion to government and a faith that the market is always right, is a global laughing stock.
Outside America,a strong conviction now exists that some new version of global capitalism must evolve to replace what the economist John Williamson coined the Washington consensus.
This doesnt necessarily mean that governments get bigger. The new model of capitalism evolving in Asia and parts of Europe generally requires government to be smaller,but more effective. Many activities taken for granted in America as prerogatives of government have long since been privatised in foreign nations even in what so many Americans view as socialistic Europe.
Which brings us back to Delaware. What if America decides to ignore the global reinvention of capitalism and opts instead for a nostalgic rerun of the experiment in market fundamentalism? This would not prevent the rest of the world from changing course.
Rather,it would make it likely that the newly dominant economic model will not be a product of democratic capitalism,based on Western values and American leadership. Instead,it will be an authoritarian state-led capitalism inspired by Asian values.
-ANATOLE KALETSKY: The author is the chief economist of a Hong Kong-based investment advisory firm
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