The Custom-House

The Real Renminbi

It's the real exchange rate between the dollar and the renminbi that matters most, not the nominal rate.

Cleveland Fed estimates suggest the real rate has fallen somewhat more than the nominal rate, but not a lot: Chinese Inflation and the Renminbi (Owen Humpage and Michael Shenk, Economic Trends, Feb 8): 

Exchange rates [the nominal rates, unadjusted for inflation - Ben] are not the only thing that matters for a country’s competitive position.  Inflation in China relative to inflation in the United States also affects the relative price of goods. Over the past year, the rate of inflation in China has exceeded the rate of inflation in the United States.  The real renminbi–dollar exchange rate combines all three of these variables—the conventional exchange rate, inflation in China, and inflation in the United States—into a convenient metric.  Since its peak in August 2006, the dollar has depreciated 9 percent against the renminbi in real terms, compared to 7½ percent in conventional exchange-rate terms.

No evidence that exchange rate flexibility speeds current account adjustment?

File this under "everything you know is wrong."

Menzie Chinn asks, Do We Really Know that a Flexible Exchange Rate Regime Facilitates Current Account Adjustment? (Econobrowser, January 7, 2007).  In the post he points to work co-authored by Shang-Jin Wei and a post by Wei at VoxEU.

The curse of a generous natural resource endowment

You'd think that a large endowment of mineral and oil wealth would be a blessing for a country. But often it isn't. "It isn't" often enough that economists have begun to speak about the "natural resource curse." That is, natural resource curse as in: "Addressing the Natural Resource Curse: An Illustration from Nigeria," a new National Bureau of Economic Research working paper (Working Paper 9804, accessed at www.nber.org/papers/w9804 on July 2, 2003) by Xavier Sala-i-Martin and Arvind Subramanian. In summary:

Since the mid-1990s economists have begun to identify an inverse relationship between resource endowments and economic growth. Various theories have been advanced to explain this, including: (a) political competition for the income from natural resource exploitation leads to corruption and general institutional disorder, and through this means undercuts growth rates; (b) income from natural resource commodities is volatile, and this undercuts growth; (c) "...natural resource ownership makes countries susceptible to Dutch Disease - the tendency for the real exchange rate to become overly appreciated in response to positive shocks - which leads to a contraction of the tradable sector. This outcome, combined with the (largely unproven) proposition that tradable (usually manufacturing) sectors are "superior" because learning-by-doing and other positive externalities..." undercuts growth.

Sala-i-Martin and Subramanian address this issue by reviewing statistically the experience of a large cross-section of countries. They conclude:

• "...natural resources appear to have a strong, robust, and negative effect on growth by impairing institutional quality. Once institutions are controlled for, there is either very little effect of natural resources on growth or even a positive effect. In other words, owning natural resources on balance may still be a blessing rather than a curse...But there is a channel through which the curse operates..."
• "...it is fuel and minerals - that typically generate rents that are easily appropriable ("point-source" natural resources) - that have a systematic and robust negative impact on growth via their detrimental effect on institutional quality...other resources do not seem to adversely affect institutional quality..."
• "...the negative marginal impact of resources on institutional quality depends on and increases with their level."

(The article is copyright 2003 by Xavier Sala-i-Martin and Arvind Subramanian.)