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PIIE Update Newsletter
October 22, 2012

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  Working Paper 12-19
The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?

Arvind Subramanian and Martin Kessler
  Arvind Subramanian A country's rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or explicitly. For a sample comprising emerging market economies, we show that in the last two years, the renminbi has increasingly become a reference currency, which the authors define as one which exhibits a high degree of co-movement (CMC) with other currencies. In East Asia, there is already a renminbi bloc, because the renminbi has become the dominant reference currency, eclipsing the dollar, which is a historic development. In this region, 7 currencies out of 10 co-move more closely with the renminbi than with the dollar, with the average value of the CMC relative to the renminbi being 40 percent greater than that for the dollar. The authors find that co-movements with a reference currency, especially for the renminbi, are associated with trade integration. Subramanian and Kessler draw some lessons for the prospects for the renminbi bloc to move beyond Asia based on a comparison of the renminbi's situation today and that of the Japanese yen in the early 1990s. If trade were the sole driver, a more global renminbi bloc could emerge by the mid-2030s, but complementary reforms of the financial and external sector could considerably expedite the process.

>> Read full working paper [pdf]
>> See also: China's Currency Rises in the US Backyard

Is India Losing Its Way?

Arvind Subramanian
  Is India losing its way? The Economist asked Arvind Subramanian and Shashi Tharoor to debate this question. Subramanian found that for every cheery statistic that Tharoor invoked, there are at least as many gloomy ones. As Joan Robinson famously said: "Whatever you can rightly say about India, the opposite is also true." The state is a problem in India, but the private sector does not present a complete solution. India's growth cannot be sustained without a revitalized state that performs more limited functions but performs them much better than it currently does. Building state capacity and improving governance involve overcoming collective-action problems, mediating conflict, and creating accountability mechanisms where outputs are multiple and fuzzy and the links between inputs and outputs murky. To avoid losing its way, India's goal should be an average economic growth rate of close to 8 percent over the next decade. The concern is that the future will not so much elude India as that its fullest promise will be either unrealized or not realized soon enough.

>> Read full op-ed

Ukraine's Outdated Educational System Translates into Lagging Economy

Anders Åslund
  Anders Aslund If Ukraine is to catch up economically with the outside world, it needs a good educational system. While Ukraine's education sector is the strongest part of its economy, its strengths are dwindling remnants of the Soviet system, notably basic education in mathematics and science. The worst weakness is the quality of doctoral education. Management training and education in economics, law, and languages are also of unsatisfactory quality. The best universities in the world are private nonprofit foundations, and Ukraine should transform its universities into independent foundations with proper governance. Then education, research policy, appointments, and finance could be decentralized to the universities. Additionally, Ukraine should accept foreign degrees: By limiting qualified teaching candidates to only those with Soviet-styled degrees, Ukraine is preserving incompetence. Ukrainian education is comparatively well financed, but the problem is wastage of resources. Ukraine's population and number of school children have been shrinking dramatically, but too few schools have been closed, and Ukraine has a wastefully high number of teachers per student and an unnecessarily large bureaucratic staff. Ukraine should also do its utmost to attract good foreign partners and support private institutions.

>> Read full op-ed

Peterson Perspectives Interviews

audio  China and the Presidential Debate: Clarifying the Record
Nicholas R. Lardy explains that contrary to assertions in the debate, China has allowed its currency to appreciate 30 percent in the last seven years. He also says that labeling China a "currency manipulator," as Governor Romney advocates, would have little effect in the absence of Congress passing legislation to impose sanctions on China.

See also:
>> Sustaining China's Economic Growth after the Global Financial Crisis
>> Eclipse: Living in the Shadow of China's Economic Dominance

audio  Iran's Bizarre Dilemma: Hyperinflation and a Currency Shortage
Anders Åslund explains how countries cope with hyperinflation and a currency shortage: Vodka, cigarettes, and other commodities become the new ersatz currency.

>> See also: Economic Sanctions Reconsidered

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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Lithuania's Elections: Protest but No Earthquake

The First Step in Europe's Banking Union: Difficult but Achievable

Has the IMF Missed the Point on Public Debt Overhangs?

Waiting For Rajoy: Theater of the Absurd in Spain

Iran Revisited: Can Economic Sanctions Delay a Military Showdown?
  With Great Power Comes Great Responsibility

Two Charts to Explain the Current State of the Chinese Economy

China's Sticky Consumers

Leading Indicators of Economic Rebalancing in China

China's Infrastructure Funding Suffers from Credibility Gap
  Nuclear Update: No News Is Bad News

Interview: Kim Han-sol interview with Elisabeth Rehn

Dandong Interviews

Effervescent agricultural reform

European luxury exports to North Korea

PIIE Noted in the News and on the Web

Washington Post
Presidential Debate: 7 Foreign Policy Questions that Should be Asked…and Probably Won't
Given the opportunity to pose a question to the presidential candidates during the foreign policy debate, C. Fred Bergsten would ask: Developments in the world economy, especially the euro crisis and the slowdown in China, could have major negative effects on our own economy and ability to create jobs. What would you do to get both Europe and China to provide stronger support for global growth and stability?

Bloomberg TV
Gagnon, Litan Analyze Mitt Romney's Tax Plan
Joseph E. Gagnon and Robert Litan, director of research for Bloomberg Government, evaluate Mitt Romney's tax plan and whether tax cuts truly pay for themselves.

NPR's On Point
A Global Recession?
Following the International Monetary Fund's warning that the risk of a new global slowdown is alarmingly high, Joseph E. Gagnon and Simon Johnson join On Point host Tom Ashbrook to discuss ways to avoid a new global recession.

NPR's All Things Considered
Do Chinese Tech Firms Pose US Security Threat?
Nicholas R. Lardy says the House Intelligence Committee's new report, which warns American companies not to do business with two of China's main telecommunication manufacturers, is filled with unsubstantiated assertions.

Wall Street Journal
Want Growth? Try Devaluing
The Wall Street Journal cites Surjit Bhalla's new book, Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences, and its conclusion currency devaluation can and has been used to create economic growth.

Marketplace Public Radio
Sprint Nextel to Get a $20 Billion Lifeline
Gary Clyde Hufbauer tells Marketplace that Sprint needed to find some kind of an alliance to survive and the $20 billion investment will allow Sprint to make investments or buy rival companies. Hufbauer says most importantly, the proposed deal is a vote of confidence in the US economy.

Preview of Our Next Issue

Comments on "Methods of Policy Accommodation at the Interest-Rate Lower Bound" by Michael Woodford [pdf]
Adam S. Posen

China's Currency Rises in the US Backyard
Arvind Subramanian and Martin Kessler

Working Paper
The Services Sector in Asia: Is It an Engine of Growth?
Donghyun Park and Kwanho Shin

In This Issue

Featured Books
Economic Sanctions Reconsidered: 3rd Edition (paper + CD-ROM) Economic Sanctions Reconsidered: 3rd Edition (paper + CD-ROM)

Gary Hufbauer
Jeffrey J. Schott
Kimberly Ann Elliott
Barbara Oegg

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