| Kippreport.com

Interview: Ronald Haddock, Booz & Co.

January 10, 2011 4:15 by Jay Akasie

How has China’s record of currency manipulation damaged the global economy? To what extent did it cause the economic crisis?
There is much debate on whether manipulation is happening at all, with Nobel prize-winning economists arguing both sides of the debate. It’s not universally agreed that China is manipulating its currency, despite this being presented in much of the Western media as “a fact.”

The only way to test the hypothesis of what the value of the RMB should be is to let it float and see how the markets react. But given the extensive linkages between currencies and competitiveness in the product markets, not only between the U.S. and China, but with so many other trade partners, it’s unclear what the consequences would be of a sudden change in the value of the RMB. A gradual change in the RMB would provide more time for the global system to react.

Those who argue China is manipulating its currency believe that doing so offers an advantage to its exports – and, from a zero-sum perspective, puts countries that import those goods, such as the U.S., at a disadvantage. Yet, if China’s exports were to decline due to a rising currency, it is likely China would earn less foreign capital, limiting its investments in the debts of countries such as America, effectively driving up interest rates in the U.S. Imagine the impact this would have had on borrowing costs in the U.S. over the past 10 years. The U.S. financial bubble would have popped much sooner, which, in hindsight, would have been a positive development.

Why have Western firms begun looking elsewhere for their outsourcing needs?

The trends toward off-shoring (i.e., companies moving their own operations offshore) and outsourcing (to third parties) continue to grow, suggesting that while isolated cases like this exist, one size does not fit all. Many companies off-shored or outsourced activities that they should not have in a headlong rush to cut costs. What we’re seeing today is a much more considered approach to both that gets an optimal balance across quality and service levels on one hand, and realized costs on the other. The key here is to understand that activities that require customer intimacy or delivery of these services close to customers are harder to offshore than those that can be broken down into bits and bytes.

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