Make Fair Exchange Rate The New Currency
Artificially low exchange rates give some countries, such as China, an unfair advantage.
FOR the past 30 years people have been dreaming of a level playing field around the world, or at least across developed countries.
It has never been accurately defined, except in a negative way. Travel and trade would not be restricted by governments. People could work and earn money in other countries and be treated the same as at home. Broadly, the whole group of countries we are interested in would be as "level" as the country we are living in. In other words, the world would be as it should be: fair to everybody.
Sounds a bit childish, but some progress has been made towards this end. The original European Union countries have adopted a joint currency and travel in the area is easier. More people speak foreign languages. But we are still a long way from "level".
Unfortunately, the general easing of controls has led to an easing of money controls. This was too much of a temptation for some people and their organisations. They could see an opportunity "to get rich quick" by taking unreasonable risks. We are experiencing the result now.
We have landed in a financial crisis that is bringing with it an economic crisis, disrupting trust and with it our economic system and conditions of employment. After all, our whole financial system is based on trust. Trust in our currency, trust in our banks and in our legal system. The danger is now that we could throw out the baby with the bath water. Let us then consolidate the progress we have made and take only careful, small steps to restore safety and general confidence. After a sudden fall in the snow, you make very careful turns until you get your confidence back.
A major disruptive force has been the migration of work and employment from the "rich" to the "poor" countries. For instance, from the US first to Japan and then to China. Let me tell a story to illustrate what happened when I visited our associates in Tokyo in the late 1970s: they were full of gloom. They were losing their lifeline market, the US. They could no longer compete there because of their own success. The yen had appreciated against the dollar and made them uncompetitive.
The Japanese government, which rigorously controlled all foreign transactions, came to their rescue. It was to invest part of the Japanese export earnings in US Treasury notes. How come, you may ask? Here is the answer.
Exchange rates used to be fixed by governments. Changing trading conditions demanded adjustments in exchange rates and these changes could be anticipated. Speculators made a killing by punting on expected movements. To stop this, exchange rates were to adjust automatically, based on supply and demand of currencies.
Obviously a simple solution. But not a good one, as we will see later.
By leaving some of their earnings abroad, Japan reduced the demand for yen. Consequently, the yen dropped in value, Japanese exports to the US dropped in terms of dollars and exports started to boom again.
This manoeuvre was not lost on the Chinese. That is why the yuan is two to three times undervalued. That makes it impossible for the US or countries like Australia to compete in manufactured goods with China. Even in our own country.
Manufacture is adding labour to materials in successive stages. If the cost of labour is artificially devalued through a manipulated exchange rate, then the resulting price of the products, in foreign currency terms, is just a fraction of what it should be.
We tend to think that these imports are so cheap because the workers abroad live on a bowl of rice a day. That may have been true a long time ago. The standard of living in the industrialised coastal regions of China is lower than ours. But certainly not so low as to justify the Chinese prices in terms of Australian dollars.
Alternatively, it is sometimes suggested that our manufacture is inefficient, that we are not productive or innovative enough. None of this is factual. Australia has an excellent record of innovation, but many of our inventions have been sold overseas.
Generally, because of a lack of available risk capital. So, what is the answer? We could revert to controlling imports, as "fortress Europe" does. That is pure protectionism, which has been blamed for all the evils of the Great Depression of the 1930s.
The US has "voluntary" export limitation agreements with countries. But despite those agreements the US is continuing to suffer, like we do, from an excess of imports over exports.
Blind Freddie can see that this can not go on forever.
To prevent following Argentina and "going broke as a country", we could legislate that all future foreign transactions must be denominated in Australian dollars. That would limit our ability to borrow and make our currency more competitive.
Finally, what would be a fair exchange rate regime? I believe that exchange rates should float to adjust for the relative standard of living between two countries. That is, the rate should represent the relative "cost-of-living baskets" of the two countries. Or, expressed differently, a person on a pension in one country, could maintain his/her standard of living by retiring in another country and having the pension converted at the ruling exchange rate.
Ernest Rodeck is a former national president of the Australian Institute of Management.
July 10 2009 The Age
