In India, a lot of people are apparently worked up about the fact that the rupee has appreciated 20% against the dollar over the past five years. No matter that it had lost 85% of its value against the dollar over the previous two decades–the rise in the rupee now is seen as alarming and dangerous for the Indian economy. The folks at the Reserve Bank of India have been pushing for some restrictions on capital flows to stop this rise from continuing. Others are calling for more drastic measures.
I know all of this because of an excellent blog post (with lots of good links) by economist Ajay Shah (via Amit Varma). Shah is on the side of those who think it’s time for India to grow up, accept that it’s part of the global economy, and allow capital flows and currency fluctuations to take their course. But follow some of his links and you quickly realize that this may still be a minority opinion in India.
I imagine similar debates are going on in China, although they’re not being fought out in public (if they are, I certainly can’t read them). Shah’s approach is surely the right one for the long term. But fact that so many policymakers in India and China aren’t ready for it is both understandable and pretty scary. It’s understandable because India and China are countries with hundreds of millions of extremely poor people, economies that only recently began to enter the modern era, and financial systems that still may not be up to the challenge of handling free flowing capital from abroad. It’s scary because China in particular is already such an important part of the global economy that by trying to delay the inevitable rise of its currency against the dollar it may be setting itself and us up for a huge and ugly shock.
Which I guess explains why, despite the fact that I usually think writing about currencies is pointless and boring, I keep finding myself drawn to the subject these days.