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Economic crisis and currency wars
Economic crisis and currency wars
Article Type: Editorial From: Journal of Advances in Management Research, Volume 8, Issue 1.
Crises provide opportunities to do new things and trigger a thought process for new paradigms. The recent economic crisis is a reflection of this in some sense. Wars create situations of destruction, ill-feeling, conflicts, and possibly reconciliation. We will discuss this idea a little further with the example of “currency war”.
It has been, by now, well recognized that the financial crisis of 2008 has been the worst of its kind after the great depression of the 1930s. The problem is far from over, although there have been signs of recovery. In the aftermath of the crisis, heavy doses of stimulus package have been given by all major economies of the world. These packages may have had salutary effects on the economic system of the individual countries but these extra doses of money supply in the developed part of the world have given rise to large inflows of funds to some of the developing countries, especially the emerging ones. The investors in the developed world are tempted to exploit the interest differential that is prevailing between developed and developing countries. When a large amount of funds flow in any country, one of the likely effects would be an appreciation of domestic currency. This, in turn, tends to reduce the international competitiveness of the exports from the country concerned. Lest the exports become less competitive, different countries try to keep the value of their currency down. Brazil, an important emerging country, has termed this practice of keeping the value of currency low as an example of “currency war”. We as humans are familiar with the traditional wars such as military wars, territorial wars, etc. Currency war has just entered into the lexicon of economics and finance.
It is widely perceived that the yuan, the currency of China, is certainly undervalued. However, despite concerns of other countries, there are internal efforts by local authority to subvert its appreciation. Seeing that the authority, which is handling this aspect of their currency, is not paying heed to this issue, except a mild tinkering, the US parliament wants to treat China's low exchange rate as a subsidy to its exporters. This is an example of the currency war in recent years.
Coming back to the large inflows in emerging economies, like India or Brazil, what are the available options? First option is, of course, to let them influence exchange rate as they invariantly do. With large inflows, the domestic currency is bound to appreciate. For countries like India, which have a large current account deficit, this option would adversely impact their exports. Second option is to impose restriction on capital inflows. The restrictions can be in the form of quantitative reductions and/or levying a high transaction tax. Brazil seems to be thinking on these lines when they openly talked about the currency wars. But the problem is that restrictions are not easy to monitor.
Another option is reversal of inflows, that is, to encourage outflows. Yet, another option is to intervene in the exchange market and buy the foreign currency and put it in the reserves. It may, however, impact inflation rates adversely. As a consequence of this action, there would be an increase in the inflation rates because of increased money supply. This option may not be a viable one, especially if inflation is already high.
No single option out of the ones listed above can handle the large inflows. A prudent mix of all the four may be necessary. However, the real solution lies in the growth momentum that not only can use the inflows effectively but stimulate further growth. Needless to say, inflows add to the productive capacity of a country. However, the problem becomes acute when they are large, sudden, and volatile. As a matter of fact, the amount of funds that flow across countries are so large that the regulatory bodies of individual countries would find more and more difficult to contain the destabilizing effects of the inflows. There is a need for international coordination. Just imagine for a moment that the USA decided to “devalue” dollar to gain competitive advantage over China with which it is running a huge current account deficit and, China, too, did so in retaliation. Would it not lead to panic in the world financial markets, since every other country would try to jump in the fray seeing the two biggest economies behave that way? A frightening prospect of real “world war” of currencies! Governments and decision makers of major economies, especially those of G-20, have a major responsibility to avoid such a war from happening.
Where do developing nations figure in all this? It would not be out of place to say that most of these nations are neither too big to greatly influence large economies nor too small to be ignored. For example, India has earned a unique respectability in the comity of nations as it has come out almost “unscathed” from 1997 Asian financial crisis as well as from 2008 to 2009 world economic crisis. Its calibrated gradualist approach on the capital account liberalization has been seen as a prudent one in hindsight. Its economic growth, despite crises, has impressed the world leaders. There is a saying, “[…] yasya astivittam, sa narah kuleena, sa eva vakta, sa cha darshniya” (that, who has wealth and is prospering, is considered of high class, an orator and worthy of paying a visit to). This saying is regarding an individual person, but it seems to be very appropriate for a nation too, especially in a globalizing economy. We believe that responsible economies of developing world will play their due role in avoiding not only currency wars but all kinds of wars so that the humanity at large prospers in peace.
Let us pick up another issue pertaining to research papers appearing in journals. When we write research papers, there is always a constraint of word limit, which poses considerable difficulty in detailing our work. For example, a large number of modeling papers lack details that are probably necessary for understanding the content by a relatively new researcher. Like a tight-rope walker, we have to appreciate that our intended reader should be comfortable in understanding whatever we write. We will never advocate for lesser rigor in research at the cost of simplicity; but we will certainly advocate that every paper should have something that can enthuse the interest of a first timer in this area of research. Additionally, if necessary, the authors may think of keeping the data files, computer programs, and other details of their papers on a webpage mentioned in the paper. We believe that such a type of augmentation in the dissemination of research would be of much help to our fellow researchers.
The present issue of JAMR contains many well-researched papers addressing different areas of management. As a policy whenever we get a chance, through JAMR we encourage research, which provides managerial insights in a more direct way. In this issue, Mr Tapan Sahoo and colleagues have discussed two case studies of strategic technology management in the auto component industry in India. Dr Ana Beatriz Lopes de Sousa Jabbour and her co-researchers have used statistical techniques to understand relationships between company size, production system, and supply chain of electro-electronics sector in Brazil. Mr Amik Garg and Professor S. G. Deshmukh have developed a model for repair inventory in management of modular electronic components. Ms Mirva Hyypiä and and Ms Sanna Pekkola have discussed interaction challenges in leadership and performance management for network organization. Professor Sanjay Sehgal and Ms Sakshi Jain have evaluated if there are momentum patterns in stock and sectoral returns that can be explained by risk factors for the Indian market. Professor G. Anand and his co-researchers have used Analytic Network Process to select material handling system for flexible manufacturing systems. Dr Asmita Shukla and colleagues have used statistical method to classify websites on information and entertainment profiles. Ms Shruti Gupta and Dr Asha Prasad have used a productivity-based hybrid model and brought out significant learning from the Indo-Japanese and Indian auto sector. All these research papers are insightful and provide important managerial lessons.
We wish a very rewarding journey to all our contributors and readers toward academic excellence.
Surendra S. Yadav and Ravi Shankar