Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
December 28, 2012

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  Policy Brief 12-25
Currency Manipulation, the US Economy, and the Global Economic Order

C. Fred Bergsten and Joseph E. Gagnon
  More than 20 countries have built up their aggregate foreign exchange reserves and other official foreign assets by a combined average of nearly $1 trillion annually in recent years—mainly through intervention in the foreign exchange markets. This practice keeps the currencies of the interveners substantially undervalued, thus boosting their international competitiveness and trade surpluses. The corresponding trade deficits are spread around the world. The largest share of demand dislocation falls on the United States, which Bergsten and Gagnon estimate has increased its trade deficit by $200 billion to $500 billion per year, and which has lost 1 million to 5 million jobs, as a result of foreign currency manipulation over this period. The United States government must act to stop other countries manipulating their currencies and permit the dollar to regain a competitive level.

The United States, ideally in a coalition with other countries adversely affected, should first seek voluntary agreement from the manipulators to sharply reduce or eliminate their intervention. If they do not do so, however, the United States and others should adopt four new policy measures against manipulators: (1) undertake countervailing currency intervention against countries with convertible currencies by buying amounts of their currencies equal to the amounts of dollars they are buying themselves (2) tax the earnings on, or restrict further purchases of, dollar assets acquired by intervening countries with inconvertible currencies (3) treat manipulated exchange rates as export subsidies for purposes of levying countervailing import duties, and (4) bring a case against the manipulators in the World Trade Organization.

In the first instance, this approach should be taken against eight of the most significant currency manipulators, including but not just China. Bergsten and Gagnon believe that cessation of intervention by these countries will induce most of the other interveners to desist as well, because much of their intervention is aimed at avoiding competitive loss to the largest manipulators.

>> Read full policy brief [pdf]

The Dollar and US Power

John Williamson
  John Williamson Today the US dollar is undoubtedly the top international currency. The one currency that looked as though it might offer serious short-run competition, the euro, has for political reasons ceased to be a rival. Nor is there any prospect of an international currency becoming a threat to dollar in the next quarter century. The extent to which this gives the United States additional power in the world economy is subject to debate. Apart from seigniorage, there are two ways in which the international role of the dollar influences US power: the balance of terror with large dollar-holders (like China), who can threaten to diversify away from dollars, but only at the cost of impoverishing themselves; and enhancing the ability of the United States to impose economic sanctions.

>> Read full paper [pdf]

Asia's Service Sector Imperative

Marcus Noland , Donghyun Park, and Gemma B. Estrada
  Marcus Noland For decades Asia's labor-intensive, export-oriented, and manufacturing-based growth paradigm has delivered growth with jobs. But as the manufacturing sector matures in many parts of Asia, its capacity to generate employment is waning. Energizing service industries is therefore vital to maintain employment growth in the region. The development of the service sector in Asia is highly uneven, with labor services productivity levels woefully low compared with levels in advanced countries. To fully unleash the potential of the service sector as an engine of growth and jobs, Asian policymakers must remove a wide range of structural and policy impediments, including strengthening labor and capital markets, investing in physical infrastructure and human capital, reforming tax regimes, and eliminating burdensome regulations that protect incumbent firms and thus stifle competition and innovation.

>> Read full op-ed

2013: Palaniappan Chidambaram's Year

Arvind Subramanian
  Arvind Subramanian Indian Finance Minister Palaniappan Chidambaram ensured that 2012 was merely a bad year for the Indian economy, rather than a disastrous one. That was no minor achievement because India was teetering on the edge of macroeconomic instability. Having taken serious reforms in 2012—modestly addressing subsidies, liberalizing foreign direct investment, creating a framework for expediting investments, and reforming banking—2013 may be a year with enormous consequences for the election year of 2014. The recent flurry of reformist measures is overdue, but they have focused more on the important than the urgent—including very little movement on addressing the critical fiscal deficit. This must be the highest priority. Following through with a credible budget can be a game changer for Indian reforms, the Indian economy, and above all, Indian politics.

>> Read full op-ed

Rise and Fall of Russia's Economic Think Tanks

Anders Åslund
  Anders Åslund The current witch hunt against nongovernmental organizations is not only harming freedom but also hurting Russia's intellectual life and policymaking. In the two decades since communism, the creation of new independent economic think tanks peaked in the early 2000s. Since 2005, the government has forced them into a rapid decline. Today, their survival is in question. With minor exceptions, neither domestic nor foreign financing is permissible. Nor is the government interested in policy research or advice, since reform is hardly on the agenda. Many of the qualified staff have left for the commercial or state sector, abandoning intellectual work, while the best researchers are emigrating. Remaining independent research institutes seek protection with one of two big state educational institutions. As in late Soviet times, the best hope for independent professional thought to survive in Russia may be in liberal state institutions.

>> Read full op-ed

Peterson Perspectives Interviews

audio  Europe's Next Wild Card: Cyprus
Jacob Funk Kirkegaard explains the curious and complex politics of the upcoming Cyprus bailout, in which loans from Russian oligarchs will have to be restructured as part of the deal.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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Europe Takes an Important Step Forward on Banking

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Land Reform and Local Government Finances

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A Legacy of Inland Development
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Sources: Alexandre Mansourov on the Succession

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Slave to the Blog Christmas Eve Humanitarian Edition: UNICEF, Rob Springs' Global Resource Services and the Peninsula at Night

PIIE Noted in the News and on the Web

Australian Broadcasting Corporation | 7.30 Program
US Budget Talks Go Down to the Wire
Adam S. Posen warns of serious consequences if talks in the United States to avoid budget cuts and tax rises aren't successful.
In This Issue

Featured Book
Flexible Exchange Rates for a Stable World Economy Flexible Exchange Rates for a Stable World Economy

Joseph E. Gagnon
Marc Hinterschweiger

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