Shawkat Hammoudeh,
TheTriangle.org
23 April 2010
As a result of increasing exports, Singapore’s economy is
booming, achieving a 13.1 percent economic growth from the first
quarter of 2009 to the first quarter of 2010. As we are all aware,
this excellent economic growth has taken place while the world
currently recovers from the Great Recession. Such extremely high
growth has its negative consequences on domestic inflation and the
exchange rate, and entails restrictive monetary and exchange rate
policies to head off those consequences.
The United States Congress attributes Singapore’s export boom,
at least partly, to currency manipulation. Congress requires the
White House to report by April 15 any country that it deems to be a
currency manipulator in order to impose surcharges on its exports.
Singapore announced its currency revaluation April 15. Congress
considers the Singapore dollar to be undervalued and believes the
Asian country has manipulated its currency to purposely keep it
undervalued, thus stealing growth from other countries,
particularly the United States. Singapore, along with China, Hong
Kong, Malaysia and Indonesia have been demanded to let their
currency appreciate in order to improve the current American
deficit.
Singapore has been in a difficult situation to make a decision
on its currency. From one side, it competes in the same export
markets with the other four countries that are called currency
manipulators. A unilateral action to revalue its currency should
put its exports at a comparative disadvantage. On the other side,
it is under threat by rising inflation expectations as a result of
a booming economy and it must work against domestic inflation.
Moreover, it is being threatened by surcharges on its exports.
Despite Singapore’s small size, its currency revaluation action
should have global implications. It has neutralized Congress’
action of imposing surcharges against its exports, and has signaled
Congress to wait on the other four booming Asian economies,
including China, because they face similar situations. However,
China, a rising superpower, takes economics and politics into
account in its relationship with the United States. China’s moves
go beyond sheer economics, but now China is experiencing the same
excellent growth, like Singapore, estimated at 12 percent. The
country experiences more inflationary pressures and bubbles than
Singapore. The appreciation of its currency is coming and is
dictated more by its economic realities than the U.S. Congress’
threats. This expected action has eased some of the political
tensions between the two giant economies, a fact that should be
welcomed by the stock markets. It will be interesting to see how
China will let its currency appreciate. Will China adopt a currency
band with respect to the dollar instead of the single peg? Equally
fascinating will be watching how the U.S. trade deficit will react
to the Asian currency revaluation. Most economists, myself
included, believe that the U.S demand for Chinese exports is
inelastic, and thus will not be responsive to changes in exchange
rates.
The upcoming currency revaluations should have a negative
impact, at least in the short run, on prices of oil and industrial
commodities, which find the strongest growth in the East Asian
economies. Personally, I believe the income effects on China’s
exports coming from the recovering world economies must be assessed
in relation to the size of the currency band that China and others
may adopt. A band between 5 and 10 percent will not have much
affect on China’s inflation, U.S. trade deficit or prices of
commodities. Higher bands may have negative impact on world
trade.
China’s exchange rate actions should have a greater relevance
for the major oil exporting countries such as the Gulf Cooperation
Council, countries that are again experiencing an early stage of a
strong oil boom. It is highly likely that oil prices will exceed
$100 per barrel in 2011 as the world recovers, strengthens and
retrenches. Oil prices are not very sensitive to available supply;
in the coming period, conventional crude oil will not be sufficient
to match demand and in the following period this oil will peak. The
GCC countries should experience inflationary pressures and early
bubbles in 2011 and their exchange rates should also become
strongly undervalued. If China succeeds in managing a currency band
with respect to the dollar, the GCC countries should take notice
and prepare their exchange rate policies accordingly. The upcoming
months will be interesting to economists and the world, and may
potentially change chapters in future economics textbooks.
Shawkat Hammoudeh is a professor of economics. He can be
reached at [email protected]