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Thursday, October 2, 2003


The uncommonly informative exchange referred to in the title here appears this month in Commentary magazine: specifically, a lengthy set of replies, favorable and critical, to a provocative, wide-ranging article published by Arthur Waldron, a specialist on China and Asia, on China's political and economic destiny that appeared in that magazine in July-August's composite issue. Entitled "The Chinese Sickness," Waldron's article set out a long argument that was full of hard-hitting criticisms of the existing regime, cast doubt on its ability to handle its challenges and problems, predicted its collapse in the future, and argued that the US is ill-prepared now to deal with the fall-out of the CP-system's collapse for China, Asia, and US policies there. The argument had a big resonance, picked up by lots of the media around the world. It also had a big echo in the circles of Chinese specialists in this country, mostly --- though not entirely --- negative; and the initial several long replies in Commentary this month, Watching China, take issue with Waldron's argument and even assault it. Others, including a specialist who was a former US ambassador to China, defend Waldron. The whole set of replies, plus Waldron's lengthy rejoinder, is a mine of illuminating views that no one interested in China's future and the nature of US-Chinese relations should miss.

Note that the original Waldron article isn't available except to Commentary subscribers who pay an extra fee for accessing the archives. No matter: while important in its own right, it's not indispensable to following the lengthy exchange Watching China in this month's issue online. Note though: the exchange will be available without fee, to judge by past experience, only this month. Hence be sure to click on the link and, at a minimum, save the entire exchange to your hard drive or print it out. Once November comes around, you won't be able to get it without paying.

What The Debate Is More Specifically About

Essentially, the initial Waldron article and his critics are to-ing and fro-ing over four key topics about China today and in the future: 1) its current political system's durability; 2) the problems and achievement of China's economy in the reform era since 1978; 3) the prospects for ambitious and necessary economic reforms if high-levels of growth are ever to be sustained; and 4) the implications for Asia and US relations with China and the rest of Asia should China's CP-system crash sooner or later. To one degree or another, all these topics have been dealt with extensively, in a wide-ranging manner, in the previous five buggy articles published here recently on China --- with the latter topic, the foreign policy implications, less so: at any rate, up to now. All four, as we noted, are closely interconnected and entail a rippling built-in conflict of vast proportions, a head-on collision in the making that pits

* the logic of political authoritarianism of the Chinese CP, on one side, with all its built-in privileges, power, and wealth-making for the CP elite and its allies

* against, on the other side, the logic of systematic reform and the reorientation of the economy . . . whose fast growth in the past has already slowed down and is bound to slow down even more, and perhaps grind to halt, without fundamental restructuring.

We'll set out these four topics that underlie the Waldron exchange with his critics in a moment or two. Keep in mind, for the time being, the key reasons why economic reform and restructuring are pressing matters.


A Brief Recapitulation of Earlier Buggy Articles on China's Inevitable Slowdown

If nothing else, convergence catch-up growth theory predicts a continued slow-down in the future . . . with the largely quantitative-driven form of economic growth hewed to so far --- after the initial productivity improvements the first decade sputtered in the next decade --- bound, sooner or later, to be overtaken by piled-up market inefficiencies and diminishing returns as cumulative capital stock rapidly swells in size. And not only that. The threat of stagnation, with diminishing returns overwhelming the economy, is all the more real because the heaped-up additions to the country's capital stock year --- very high levels of annual investment --- have been taking place behind big protectionist walls and with other forms of statist interference galore. (A brief sidebar observation: Official Chinese stats show a huge increase in labor productivity the last decade --- something highly doubtful, based as the claim is on an alleged annual growth in GDP of 8.6% since 1990.)

All of which prompts a key question: can the Chinese economy shift away in the next decade from a quantitative self-doomed growth path to a far more qualitative economy, driven forward by sustained technological progress and efficient high-level productivity growth?

So far, the outcome isn't at all clear. The two at-odds logics that dominate Chinese life --- political authoritarianism and vast privileges and concentrated power in CP hands, on one side, vs. on the other the logic of market-efficiency and qualitative growth --- are beginning to collide more and more. Since 1978, the collision has been generally blunted and finessed. Over those 25 years, to be more concrete, the Chinese CP has followed an easy-to-hard sequence of reforms. As a result, all the most difficult, politically divisive reforms --- full of social dislocations and charged hot-wire social tensions --- remain on the front-burner, sizzling away.

What are the needed reforms? Recall that an earlier buggy article on China's future set out and analyzed them in China's Economic Future III, and in a few moments we'll list them briefly again here. Whether or not these hard, hot-wire reforms will be implemented resolutely and in a timely fashion isn't at all clear, just the opposite. It's essentially a matter of political will, with the CP leadership having the foresight, courage, and unity that now don't exist to summon them into existence and carry out a decisive reform strategy . . . even if, ultimately, that requires political abdication of its power monopoly and all the privileges, power, and wealth-making that monopoly now entails. As the World Bank has noted in a recent memorandum on China's economy --- Promoting Growth with Equity --- "It will be a task of enormous political will and strategy to navigate among sources of resistance and to mitigate the sharpest edges without undermining the objective of China' s growth with equity."

We'll examine the Waldron debate in detail, but for the time being let it simmer here as you shift focus and consider the following brief comments about Commentary magazine, and it's importance in US intellectual circles --- not least, those circles concerned with foreign policy.


A Short Interlude: What Is Commentary Magazine?

Published monthly by the American Jewish Committee, Commentary is one of the four or five most influential journals of general intellectual opinion --- political and economic and artistic --- in American life, along with the New Republic, the National Review, the Nation, and The New York Review of Books. Possibly the Weekly Standard , a newcomer this last decade, has to be added to this list now. Note the emphasis on general intellectual opinion. Commentary, like its competitors just mentioned, has a lot of academics writing for it, but not as specialists writing for specialists, and for that matter not with an academic audience in mind: like these others --- including their online fare --- it's a magazine of high-quality journalism and opinion. What does make Commentary, a monthly as opposed to these weeklies ---or bi-weekly for the NYRB ---is its uniquely long letters' column, often a third of the magazine's length. The replies to its articles --- often 10-20 pages in Word's manuscript at times --- are given full-tilt room in the letters' column, followed invariably by

Commentary's also a neo-conservative fount, a political ideology that a couple of buggy articles dealt with earlier this spring, amid the flap of its alleged influence in Bush circles in foreign policy. See Who Are the Neo-Conservatives? Part One and Part Two

As with the original editors of the no less influential Public Interest --- a quarterly of public policy, with a stronger academic thrust --- Commentary's editors, above all Norman Podhoretz, were originally liberals (some with radical backgrounds). Like those who founded the Public Interest --- Daniel Bell, Irving Kristol, Nathan Glazer --- Podhoretz and his liberal staff were reacting sharply to the excesses and extremism of the radical left that emerged in the late 1960s and early 1970s, with their mixture of extravagant utopianism, their hostility to middle class American life and American capitalism in its reformed, post New Deal, Great Society form, their furious alienation from the US of American power in the world, and --- so these worried liberals wondered --- the quality of their patriotism. That was in the early 1970s. The subsequent utopian-extremist shift toward outright pc-dogmas and orthodoxy of a thought-control sort that began to take hold in American universities further antagonized these and other prominent liberals, with a predictable result: they moved rightward and became the vanguard of neo-Conservatism in American politics.


Originally, neo-cons were not welcomed by the paleo-conservatives that dominated the Republican Party in those days and had, to be blunt, at most a dozen or two noted intellectual spokesmen, mostly gathered around the then only serious journal of conservative intellectual life, William Buckley's National Review (founded in the mid-1950s). The initial conflict between paleo- and neo-conservatives was sharpened because the dominant conservative intellectuals and followers were essentially old-time Wasps, whereas the neo-Conservatives in large number were Jews (with James Wilson and Jeannie Kirkpatrick of Georgetown and William Bennett, a philosopher, and Samuel Huntington notable exceptions.) Over time though, in the Reagan era, the moderates among the Buckley crowd made peace with the neo-conservatives, while those estranged still gathered around Pat Buchanan. In the 1992 presidential election, with Buchanan appealing to the right-wing of the Republicans, Buckley went so far as to devote an entire issue of the National Review to exposing and condemning Buchanan's anti-Semitism and admitting how Buckley himself and other Wasps --- the term used to include also high-status Catholics, not just Protestants by then --- had grown up in an atmosphere of anti-Semitism which Buckley fully renounced as morally wrong and politically deplorable. Buckley's admission had a big tonic effect. Within a few years, Jewish neo-cons were prominent in the editorial staff of the National Review, until then a Wasp-icon, little else.

In the growing influence of neo-cons, former liberals to a man, Podhoretz's Commentary played a key role . . . Podhoretz himself a one-time liberal of considerable influence in Democratic circles.

More specifically, what happened was this. The Reagan administration made Ronald Reagan the common icon of the reconciled Conservative and neo-Conservative intellectual right in this country, later joined among others by David Horowitz . . . a former extremist radical of the sort who had repelled the original neo-cons in the late 1960s and early 1970s. The co-editor of Ramparts, the radical left's bible-journal of the late 1960s along with Larry Collier, Horowitz (and Collier) -- not just liberals but high-pulsating radicals, worse, with Communist influence strong in Horowitz's upbringing as he admitted in his intriguing autobiography, Radical Son --- were themselves eventually left repelled by the excesses of radical left activists, radical pc-professors, black-power paranoids, violent anarchic Weathermen, and just general know-nothing grudges and resentments that began to flourish in radical leftist circles by the mid- and late 1970s. Since the early 1990s, Horowitz's Frontpage online magazine has made him the scourge of the left-wing pc witch-hunters and thought-control types rife on our campuses; its articles draw on a wide range of journalists and intellectuals, conservatives and moderate liberals . . . many of them, like Horowitz and Collier, former radicals or Communists or apologists for Communist and crackpot destructive regimes in the developing world during the cold war. The New Criterion, headed by Hilton Kramer --- a former New York Times critic --- has also emerged as a major intellectual journal of general opinion, specializing more in the cultural and artistic realm, worried about the decline in traditional high-culture standards that has been abetted by what Kramer and other conservative intellectuals regard as pc-endorsement of debased, profit-driven mass cultural works in literature, painting, the movies, TV, and music. The Weekly Standard, edited by Irving Kristol's son, is more political. The National Interest is more or less a foreign-policy equivalent of the Public Interest. The New Republic, while neo-conservative to a large extent in foreign policy, remains Democratic and liberal in economic and social policies, and has been strongly critical of the Bush administration's work in these areas. The Nation is an outlet of lib/rad thought, and to a large extent --- though it's far less concerned with politics --- that's true of the New York Review of Books.

The key point to note here is about Commentary is this. Though its articles are clearly of a neo-conservative thrust --- whether dealing with domestic or foreign policy matters --- its letters column remains unique in all of journalism, not just in the English-speaking countries but probably in the world (certainly there's nothing remotely like it in France or Germany or anywhere else in Europe I'm aware of). And the exchange of views is not censored, with radicals and liberals automatically stigmatized and pushed aside.

And now back to Waldron and his critics.


The Four Key Issues Debated by Waldron and His Critics

1) What Is the Nature of the CP System Today?

And not least, Waldron argued in his September Commentary on Hong Kong as well as in his July-August piece, what is its nature and durability in the light of the SARs epidemic and the systematic efforts of the regime to clamp a lid initially on its outbreak and scope . . . with all the dangers to Chinese health and for that matter of the health of other countries in the region and around the globe. In particular,

* how competent or incompetent it is,

* how rife is the corruption and nepotism in the CP and government,

* how extensive is political alienation is among the public,

* and how flexible it is or not in order to adapt in the future to new serious problems and challenges.

Looking at these matters, Waldron concludes that mass resistance to the failures of the regime on each is inevitable and a crash likely, with the system generally unable to do more than try opening up. At that point, all its complex, highly rooted shortcomings and rigidities will overwhelm it once major social tensions and democratic movements emerge in China again to challenge its secretive, closed, privileged authoritarianism, as happened in the late 1980s run-up to Tiananmen Square. He's uncertain ---- who isn't?---

1) whether the system will then survive by means of new, even more extensive repression and violence against a much more complex, better educated population hungering for freedom and shared power over their destiny;

2) or whether --- as resistance and dissent multiply on a mass level again --- the CP system will, as in the Soviet Union and East Europe, just crash to pieces in a surprisingly fast manner, a victim as these other CP systems were of its tenaciously rooted inflexibility and contradictions on which the existing CP's power, prestige, and wealth-making now repose perilously.

By contrast, Waldron's well-known academic critics --- 12 of them alone signing a composite reply --- think a 3rd alternative is possible:

3) a gradual opening up and adaptation, first by co-opting new members of the well-to-do business and financial classes, presumably also --- well, they don't state this in their long letters (given the limits no doubt on space) --- the new technocratic classes in the private sectors and in the remaining state-enterprises and reformed governmental bureaucracy --- all the while, if this were to happen, neutralizing the impact of discontented workers, peasants, students, and members of whatever new social movements like the Falun Gong might emerge.

The exchange between Waldron and his critics here is illuminating, especially if you know much about the existing problems in the system . . . but it would help if it were continued in the future by the critics then setting out in more detail the evidence for their view that a third alternative --- evolutionary adaptation --- is likely. Waldron himself urges this. So far, he says, little systematic thought seems to have been given to the topic of regime endurance or adaptation or failure in Chinese studies here.

Later on in this buggy article, we'll deal with the matter again . . . without being able to settle it. Obviously. We'll do so by setting out in greater detail the abundant evidence for the claim, admitted to even by the CP party in that unusual document it made public in June 2001, to the effect that the CP has alienated the Chinese population over the last two decades. In part, this is because so many people have been left out of China's booming growth since 1978, or even actually hurt; in part, however, because of the widespread impression that it has become little more than an engine of self-aggrandizement and self-enrichment, grinding out corruption and nepotism and arbitrariness galore. Whether that means the system can't endure or adapt is another matter. No one can say right now, and certainly not a non-specialist on China like myself.


2) What has been the quality and pace of economic growth in China since the reform era started in late 1978 to the present?

In particular, has the growth of GDP been as high a rate as Chinese officials claim (nobody accepts this) or approximately as high or much lower, all controversies the buggy articles handled.

We went into the controversies about this in the earlier buggy articles published here in late September, and those who read them should have no trouble making sense of them in the exchange between Waldron and his critics. Note the reference to Thomas Rawski's unusually stimulating work, endorsed by Waldron, which the critics take issue with . . . work, remember, that we dealt with too.


3) Can the economy sustain any high growth rates into the future, without wholesale and politically divisive reforms . . . almost all the difficult, high-voltage ones all lying ahead

The earlier buggy articles on China set these out at length. For that matter, they were set out again in the recent World Bank memorandum, 15 pages long, referred to earlier here: Promoting Growth with Equity. They include big, controversial changes to deal with:

* finance and the banking system, with huge debts (anywhere from 30 - 60% of GDP, and maybe double that).

* the still hulking size of the state-enterprise system,

* the lack of effective property rights and legal protection,

* the lack of a solid social security safety net,

* the need for reallocating more and more money to this net and education and huge expenditures for environmental protection,

* the pressing need for a much greater equality across regions and social classes of wealth and income

* and not least a far more opening to international competition to ensure that China's huge manufacturing firms and agriculture become internationally competitive instead of absorbing huge investments behind big protectionist barriers.

Nor is that all. There's also the urgent problem of

* stopping and punishing the rife extent of corruption, nepotism, and crony clientelism in the huge state and local bureaucracies, the military, and above all the CP itself, some 64 million strong, all a vast drain on China's resources and bound to cause major misallocation of investment funds in the future.

The Alternative?

All these reforms, if carried out, would require far more transparency, openness, and accountability. They would also require, to put it bluntly, that the CP to go out of business, either abruptly (the crash-scenario as in the Soviet Union) or gradually through steady and noticeable adaptation over two or three decades. What's the alternative? Not encouraging for China's future. Bluntly put again, it's for the huge mountains of market inefficiencies and bad debt --- entailing a vast wastage of scarce capital and talent --- to continue piling up and overwhelm the markedly incoherent economy that has emerged since 1979. At some point, if these inefficiencies, bad debt, and rigidities continue to mount, then diminishing returns will set in and bring China's growth to a halt, a victim of what the World Bank itself predicted in 1997 --- China 2020 --- would happen without systematic reform by then: a fate it called Sinosclerosis.

Note. Even if the Soviet Union isn't a good warning here --- China's economy, among other things, far more integrated into the global economy than the USSR's ever was, with far more market-generated dynamism in the private sectors ---- Japan's should be. Once touted as the world-class contender to overtake first West Europe and then the US in GDP and per capita income, the Japanese economy --- for all its advantages compared to China (far greater per capita income, far greater levels and dynamism of technology, far greater use of markets, and a stable democratic system) --- has faded badly, ending in stagnation the last decade . . . a victim of its own home-grown mountains of bad debt, unreformed banks, over-regulated government intrusions, over-protected industries, and a variety of other statist- and corporate- traps that conflict with the logic of free markets and openness. Or more specifically, a victim of the Japanese political elite in the Liberal Democratic Party --- like the Chinese CP, in power for over half a century with tremendous privileges and wealth-making for its leaders --- and its reluctance to force through the necessary but painful and socially dislocating structural and policy changes that the Japanese population itself seems to fear . . . even as it ages rapidly, state debt has piled up to about 140-160% of GDP (vs. about 42% here and around 60% in Germany and France), and more and more pensioners have to be supported by a shrinking work force, already heavily burdened and taxed.

Or as the recent World Bank memorandum just linked to put it --- in language unusual for its political implications, given the Bank's avoidance of political analysis:

Given various competing interests typically facing government and given the complexities of structural and institutional reforms, these priorities may, at times, be difficult to implement. Although beneficial for the majority of China' s population and for China' s national competitiveness in a globalized economy, each of the policy priorities listed above is likely to be resisted by some interest groups, and there will be many trade-offs that will have to be weighed. For example, reforms of the banking system will likely affect the flow of credit in a way that is good for the long-term but may have adverse employment consequences in the short-term. Reforms in inter-governmental finance, pensions, the composition of public services, and macro-economic risk mitigation are specific areas where the costs and benefits to different groups will vary significantly. Moreover, policy-induced changes will occur within the broader context of major structural changes that are underway already, partly to accommodate the forces of globalization. It will be a task of enormous political will and strategy to navigate among sources of resistance and to mitigate the sharpest edges without undermining the objective of China' s growth with equity."


4) The Foreign Policy Implications for Asia and the US If China's System Can't Reform and Crashes


Replies: 1 Comment

I am still hoping for a soft landing. The stories reported on the front page of today's WSJ ( far right hand column) highlight the need for reforms. However , if you hold your nose and close your eyes these stories of excess borrowing could be about the US . If the US can engineer its own soft landing by getting back to adding jobs so consumers can buy more stuff and pay down debt maybe China can do the same.



I. Thanks for this and your other comments. As for a soft landing, no one knows for sure: we need about 3-10 years to see whether CP efforts to open up the political system go beyond limited efforts, repeated by President Hu Jintao yesterday --- and first bruited in CP public pronouncements in the summer of 2001 as the succession of Jiang Zemin was materializing --- to co-opt the new business, financial, and emerging technocratic elites. I'll try to extend the analysis in a new article, underscoring the evidence we have of pronounced political alienation from the CP-dominated system among the Chinese people. (Anyway, that's how best, it seems, to interpret Hu's declaration.)

The problem of interpretation just mentioned leads to a wider point here. Overall, the CP system is still highly secretive and maintains tight censorship so that getting solid information about the divisions and factional struggles within the leadership circles --- roughly a few hundred top-dog types --- is hard to come by. Mostly, whether in or out of China, we're all left to speculation.

In the meantime, the ISP where the buggy site is located had some trouble today with one of its servers, and so I couldn't finish the current article commentary. We still need to discuss some of the foreign policy implications of what happens if the Chinese system enters a crisis period similar to the late 1980s, only in a society that's far more complex, sophisticated, and middle class in at least the coastal cities and in Beijing.


I. As for the analogies with the US, they're pretty far-fetched. We've no banking crisis or bad debt at all in the financial system, and even with the high federal deficits likely to emerge this year and next, total government debt to GDP will rise to around 50% --- still lower than in most of the EU, far lower in Japan (about 140%), and far lower still than in China, what with the banks and state-enterprises, both bankrupt to a large degree, state-owned and managed.

The trade deficit --- more specifically the current account (trade in goods, plus in services and unilateral transfers) --- it's unusually high at 5-6% of GDP, no two ways about it. But as long as Japan's and China's Ministers of Finance --- or Central Banks (here the Treasury Dept is in charge of the exchange rate, not the Federal Reserve) --- are spending fabulous sums daily to buy dollars, the dollar will stay way overvalued, as the dollars flow into Treasury securities, corporate equity and bonds, and who knows what else in the way of financial assets (real estate?). Japan's government admitted the other day that it bought $38 billion worth of dollars alone this last month! That's an annual rate of nearly $500 billion a year!

II. The US trade deficit in goods and services --- especially the former --- is further swelling because while the US economy is now growing strongly (and fairly decently the year before), the EU and Japan have been stagnating. That reduces the buying power of their firms and consumers to buy US products, while encouraging their firms to export into the US booming market. That's also true of most of Pacific Asia, apart from China. As for China, even if its GDP growth is somewhere between --- let us guess generously --- 5.0-7.0% annually the last few years --- the Yuan's being pegged to the dollar at 8.3, and staying there rigidly as the Chinese government buys up to $80 - 90 billion each year to keep the Yuan from rising higher than the peg, means that even without all the protection around the Chinese economy (including controls over convertibility from Yuan to dollars), the ability of the US to sell more than $16 billion of exports at the current annual rate --- vs. $120 billion imports from China --- has further swelled the trade deficit.

As for the debt owed to foreigners, any analogies with China or other developing countries are doubly misleading because the US --- the US Treasury, firms whose equity or corporate bonds are owned by foreigners, and so on --- owes this money in dollars, something we can never run out of. By contrast, you get currency crises like the ones in Asia in 1997 or in Brazil 1997 or Russia the next year or Argentina more recently because foreign investors know that those countries have limited amounts of dollars, euros, or maybe Yen. As a result, once the confidence of foreign investors is shaken in the ability of the country's banks and firms and government to pay back the principal and interest on their investments, a pell-mell panic-selling can be set off. Nobody, after all, wants to be left with IOU's that can't be paid in the only currencies they will accept.

On top of that, as long as the EU and Japan continue to poke along in GDP growth --- Japan finally, after 12 years of stagnation, maybe beginning to stir again --- then Europeans and Japanese and foreigners who want to invest their money with good prospects of capital gains will continue to send money to the US stock market more than to the stock markets of those countries.

There is, of course, a genuine worry that the dollar, once it begins to sink in value, will continue to depreciate, and for that reason the pace of foreign investment flowing into the US will slacken. Oddly, though, this did not happen much in the era of the late 1980s, when the dollar was sinking rapidly.

Which brings us to the next point:

III. Keep in mind that the high dollar of the early 1980s also led to staggeringly high current account deficits, caused by a steep rise in the dollar as hundreds of billions of dollars worth of foreign investment streamed into the US for about four years. Then the Plaza accord was reached between the US, Japan, and Germany (plus a few others), and the dollar than plunged in value by almost 60% against the Yen and the German Mark . . . the rest of the EU's currencies themselves more or less pegged to that German currency. But note:

1. The sudden decline in the US current account deficit --- it reached a small surplus by 1991 and 1992 --- entailed rapid and persistent decline in NET foreign investment as an offset on capital account in the balance of payments. Despite this, interest rates did not rise: the key 10 year Treasury bond rate, which had been falling since 1981, continued to fall throughout the period of the low dollar and low net foreign investment . . . contrary to crowding out. (Note this on a net basis: the total inflow of foreign dollars as opposed to the total outflow. The actual pace of foreign investment in the US, interestingly, did not slow down as much as had been anticipated, leading the US Treasury and its counterparts abroad to sell more dollars than they had expected would be needed . . . precisely to keep the dollar from rising again.

2. Simultaneously, despite fears expressed by many observers, the declining dollar did not set off any new inflationary pressures. Inflation continued its steady downward trend, ending up in the early 1990s in the 2.0 - 3.0% zone that the Fed is comfortable maintaining. (Anything lower, and the Fed will worry about deflation.)

3. And even more interestingly --- given the dependence of Japan, Germany, and some other EU countries on export-led growth --- the rapid decline of the US trade deficit in goods (US exports doubled in five years between the start of 1986 and 1991) did not harm their GDP growth. Just the opposite. The EU and Japan increased noticeably their growth after 1986 and maintained it until the end of 1991, after which, for purely home-grown reasons, growth plummeted and stayed near zero in Japan and plummeted and remained, with some ups and downs, at best moderate in the EU the rest of the 1990s and much lower since.

Given all this, what follows for the future? Well, it's hard to see any harm to a strongly falling dollar for the US. On the other hand, compared to the late 1980s, Japan's economy and the EU's are now much weaker, and their governments --- or Central Banks --- fear, it seems, the predicted slowdown in their GDO if their currencies, the Yen and Euro, appreciate very much. It doesn't follow the dollar won't decline anyway, maintaining its depreciating rate (with some ups and downs) against the Euro and more recently the Yen. So far, the decline has been limited. On a trade-weighted basis, including Asian developing countries, the dollar has fallen about 9-10% only. So far, the euro --- up about 25-30% against the dollar since the end of 2001 (but still about 2-3% below its initial exchange rate of 1999) --- has been carrying the burden of the decline.

-- Michael Gordon the buggy prof

Posted by Steve Shea @ 10/03/2003 11:30 AM PST