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The Political Economy of the Undervalued Renminbi

  • Ingrid H. Rima

    ()

    (Department of Economics, Temple University)

A relatively new phase in China's reform since the Cultural Revolution is evidencing itself in the focus given to direct foreign and joint investment in large-scale manufacturing industries that yield increasing returns. The ongoing relative cheapness of the yuan at 6.78 to the dollar is assuredly enhancing the effectiveness of China's export program. The U. S. Congress maintains that a more expensive renminbi would ease the plight of the American manufacturing sector and laid-off workers. However, the argument of this paper is that the success of China's trade is not based on Ricardian comparative advantage. Its trade reforms are better explained in terms of increasing returns as set forth in Nicholas Kaldor's restatement of Verdoorn's Law and Adam Smith's "vent for surplus" principle. This analytical perspective seems particularly relevant, given contemporary political concern about the value of the yuan. Given the attractiveness of China for direct foreign investment (DFI), what is the likely ultimate effect on the distribution of the world's wealth? It seems possible that trade can alter the distribution of the world's negotiable wealth in the twenty-first century in much the same way as the programs of the World Bank and the IMF enabled the OECD countries and the United States to control some 85 percent of the world's wealth in the twentieth century.

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File URL: http://www.cla.temple.edu/RePEc/documents/detu_10_12.pdf
File Function: First version, 2010
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Paper provided by Department of Economics, Temple University in its series DETU Working Papers with number 1012.

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Date of creation: Oct 2010
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Handle: RePEc:tem:wpaper:1012
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