Once again there is talk about the strength of the Indian rupee potentially hurting Indian exports because it has appreciated in the past few weeks relative to the U.S. dollar. “Should the Reserve Bank of India (RBI) intervene and if so when to halt the rise of the rupee?” has become the staple of the discussion.
The world is chained to the U.S. dollar. It is in this currency that most payments in international trade are made, severely handicapping countries from importing if they do not have adequate reserve of dollars. Conversely, to earn dollars, countries have to export their goods and services which have to be price competitive in global trade to be saleable. And this means their currencies have to cheaper relative to other currencies to spur their exports. In all of this, there is no effort made to trade in native currencies but only the anxiety to export to acquire dollar reserves. The idea is that goods and services exported by a country to other countries will cause economic development at home. Domestic investment and consumption usually do not factor in this calculus and economies are oriented entirely toward exports.
China has developed by becoming the factory to the world, thus far typically assembling imported parts of goods to export finished goods back to foreign markets. But China has also done something different. It invested in domestic capital accumulation and consumption using its export revenues in dollars to be able to eventually wean itself of export dependency while also attempting to climb up the export value chain by increasing its manufacturing sophistication to make high-end manufactured goods entirely within China and by diversifying into services. In this process, the Chinese currency, the renminbi (yuan), is gradually joining other currencies that are used in international trade and is now officially a global reserve currency.
The attractiveness of China’s economic development to countries importing from China is its vast market of about 1.3 billion people if foreign companies are allowed to compete on an even keel with domestic companies. The country has used this well to its advantage to turn itself into a global economic power but by principally subsidizing the Chinese industry giving it a leg up over foreign competitors. The next step of the Chinese juggernaut is global expansion to create and develop markets for its exports and technology acquisition to achieve advanced market economy status. None of the other developing countries are doing what China has done and by doing so the country has catapulted itself to become the world’s largest economy in purchasing power parity (PPP) terms and the second largest in nominal terms. China’s role in the current paradigm of globalization is to become a net exporter like Germany and Japan, curtailing as many imports as it can.
The key issue for economic development here, however, is the existing international currency and trading system which requires, for economic development, foreign currency reserves of stable currencies in which international trade is done. Little or no thought has been given to changing the system to develop capacity within countries to use their own currencies for domestic investment, consumption, and trade. China has succeeded by taking advantage of the status quo to its benefit but this is not a model that is sustainable because the advanced countries cannot continue to be net importers of goods and services from developing countries providing reserve currency hoards in the process to developing countries. Therefore, India emulating China is not a sustainable option either for itself or for its trading partners despite India being the leading exporter of information technology (IT) services to the United States and Europe.
India should insist on making payments in the Indian rupee for its imports while working to produce most of what it needs domestically to minimize imports and must accept trading partner currencies as payments for its exports, displacing the intermediation of the U.S dollar in global trade, thus heralding a new paradigm in global trade and economic development.